annual report 2006 - pidm · executive management committee: members and profile section 1:...

ANNUAL REPORT 2006

The Unmanila.This type of rope “… is one that combines tradition with progress.The rope holds a knot extremely well andprovides an excellent gripping surface tominimise slippage when held. It has all theadvantages of modern synthetics - it is rotproof, water proof and not easily damaged.”

In Malaysia, the traditional use of a rope as depicted is to reinforce the basicfoundations of a construction.

At PIDM, we see the use of our “rope” in a way that similarly combines tradition withprogress. Key elements of progress - like thestrands of a rope - have been woventogether carefully to ensure that thefoundations of PIDM are strengthened.The key elements that make our “rope”and therefore our foundations strong are our clear strategic direction, our soundgovernance policies and procedures,our dedicated people and our emphasis on professionalism and commitment toexcellence and the highest of ethical standards.

3 4Perbadanan Insurans Deposit Malaysia

OUR VISIONTo be recognised as the most effective deposit insurer in Southeast Asiaby 2008.

To be acknowledged as one of the leading deposit insurers in the worldby 2010.

OUR MISSIONPIDM shall protect Islamic and conventional deposits, provide incentivesfor promoting sound risk management, and promote and contribute tothe stability of the financial system in Malaysia. PIDM will fulfill its mandatein an efficient and effective manner, having regard to the interests of itsemployees and other stakeholders.

OUR VALUESExcellence and Professionalism

Respect and Fairness

Integrity and Trustworthiness

Communications and Teamwork

Financial Stewardship

THE YEAR IN SUMMARYHIGHLIGHTS OF 2006

AS A NEWLY ESTABLISHED CORPORATION

• Implemented key governance policies and Code of Business Conduct and Ethics, including a Whistleblowing Policyand issued documents defining the respective roles of the Board and Management.

• Implemented a new and comprehensive financial management system.

• Issued our ‘Guidelines on Total Insured Deposits’ and ‘Guidelines on Disclosure Requirements for Joint Accountsand Trust Accounts’.

• Crystallised frameworks and plans for internal audit, enterprise risk management (“ERM”) and differential premiumsystems as well as concept papers for key regulations.

• Developed the key frameworks with regard to risk assessment, monitoring and payout activities.

• Worked on raising public awareness with various activities.

• Hosted the Executive Council meetings of the International Association of Deposit Insurers (“IADI”).

• Accepted as the first deposit insurer on the Islamic Financial Services Board as an Associate Member.

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The two-year highlights are shown below.

Perbadanan Insurans Deposit Malaysia

(January-December 2006)RM

(September-December 2005)RM

Movement%

2006 2005

BALANCE SHEET ITEMSTotal Assets

Total Liabilities

Deposit Insurance FundsConventionalIslamic

INCOME STATEMENT ITEMSPremium Revenue

ConventionalIslamic

Investment IncomeConventionalIslamic

Operating Expenses

Net Surplus

127,020,219

4,545,838

122,474,381111,218,89111, 255,490

102,122,20592, 719,0079, 403,198

2,815,5602, 576,330

239,230

15,005,425

89,932,340

283

617

276277273

186186185

127612941106

350

175

33,176,484

634,443

32,542,04129, 527,9763,014,065

35,671,77032,368,7543, 303,016

204,692184,85119,841

3,334,421

32,542,041

OUR PEOPLE

• Filled the rest of our key positions and also built up our organisational team.

• Established compensation and benefits and performance management policies to build and retain a results-oriented team.

OUR PARTNERS

• Executed a Strategic Alliance Agreement with Bank Negara Malaysia (“BNM”).

• Engaged our member institutions to create public awareness about deposit insurance.

• Worked closely with other regulators, in particular BNM, as part of the financial safety net team.

• Engaged member institutions and other stakeholders through consultations on our proposed regulations and seminaron ERM.

OUR FUNDS

• Total deposit insurance funds expanded to RM122 million as a result of premiums collected for over a period of 12months.

WHAT TO LOOK FORWARD TO

• Our Corporate Plan 2007-2009 sets out our strategic direction and we will report our progress against key initiatives setout in this plan.

• We will continue to build capacity and capability, including completing our internal control framework, commencing theimplementation of our ERM and continue the development of our risk assessments, intervention and payout framework.

• Our differential premium systems are targeted for implementation by 2008.

• We will continue to build credibility through our public awareness work.

• We will continue to build international credibility through international engagements, including, in 2007, hosting theConference and Annual General Meeting of the IADI in Kuala Lumpur.

CONTENTSMessage from the Chairman,Tan Sri Dato’ Abdul Aziz bin Haji Taha

Message from the Chief Executive Officer, Jean Pierre SabourinBoard of Directors: Members and Profile

Organisation ChartExecutive Management Committee: Members and Profile

SECTION 1: INTRODUCTION

SECTION II: CORPORATE GOVERNANCEStatement on Governance

Statement on Internal Control

SECTION III: MANAGEMENT’S DISCUSSION AND ANALYSIS Our Operating EnvironmentReview of 2006 Operations

2006 Financial OverviewSummary of Our Corporate Plan 2007-2009

SECTION IV: FINANCIAL STATEMENTSDirectors’ Report

Statement by DirectorsStatutory Declaration

Auditor General’s ReportBalance Sheet

Income StatementStatement of Changes in Funds and Reserves

Cash Flow StatementConventional Deposit Insurance Fund – Balance Sheet

Conventional Deposit Insurance Fund – Income StatementConventional Deposit Insurance Fund – Cash Flow Statement

Islamic Deposit Insurance Fund – Balance SheetIslamic Deposit Insurance Fund – Income Statement

Islamic Deposit Insurance Fund – Cash Flow StatementNotes to the Financial Statements

SECTION V:ARTICLESOur Governance Framework

Compliance with Best PracticesAppendix: Self-Assessment of Compliance with FSF Guidance

Enterprise Risk Management

SECTION VI: PUBLIC AWARENESS AND EDUCATION

SECTION VII: CALENDAR OF EVENTS

APPENDIXList of Member Institutions

Charter of Governance CommitteeCharter of Remuneration Committee

Charter of Audit CommitteeBoard Governance Policy

Position Description: Members of the Board of Directors Position Description: Chairperson

Position Description: Chief Executive OfficerCorporate By-Laws

Policy for Disclosure of Information Concerning Wrongdoing in the WorkplaceCorporate Scorecard

Glossary of Terms Frequently Asked Questions

Contact Details

9-24

25-28

29-46

47-62

63-98

99-120

121-126

127-134

135-193


MESSAGE FROM THE

CHAIRMAN

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Governance is the cornerstone for buildingPIDM. During the year, we have workedextremely hard to build and strengthen ourgovernance policies and practices. Ultimatelyour credibility and integrity depend on ourcapability to demonstrate to our stakeholdersthat PIDM is well governed and well managed.

Since our focus is to provide transparencyabout our work , our theme for this AnnualReport, therefore, is “Strengthening Governance;Building Credibility”.

REPORTING ON OUR GOVERNANCE

During the year, we have established the necessary governancearrangements and structures, risk management and sound internal controlsystems, both at Board and operational level. A key effort has been towardscompleting our Board governance policies and practices and we haveadopted a Board Governance Policy to set the standards for meeting ourobligations to the Corporation. This Policy is benchmarked againstinternational and domestic best practices and recommendations, and isbased on the core principles of openness, integrity and accountability.

In our Board Governance Policy, we set for ourselves a total of 15standards of governance, against which we report our performance indepth on page 33 of this Report. One of the key standards in the Policy,I would note, is the responsibility of the Board to consider, on a regularbasis, whether the Corporation is “in control” of its affairs and business.This requires the Board to obtain reasonable assurance that the operationsof the Corporation are managed effectively within its strategic and riskmanagement process.

We have also adopted a process for evaluating the Board’s effectivenessand the effectiveness of our three Board Committees, both as a group andas individual members. As Chairman of the Board, I led the evaluationprocess for this year (in January 2007), as part of the Board’s year-endwork, and I am pleased with the results of our evaluation at this stage ofour development. We will also continue with our Board educationprogramme, the first of which was on the Green Book on Enhancing BoardEffectiveness. This education session was conducted by subject matter

Perbadanan Insurans Deposit Malaysia 11 12

experts from Khazanah Nasional Berhad, the secretariat from the Putrajaya Committee on GLC High Performance, andprovided Board members with an opportunity to discuss some practical issues on governance.

We have published our governance policies to enable stakeholders to track and judge our conduct and progress and are amongthe very few organisations in Malaysia to hold ourselves accountable against such principles and standards. I am gratified withour progress in this regard and I believe that in just 16 months of our existence, we are at the forefront of corporategovernance in many ways.

GOVERNANCE AT ALL LEVELS OF THE ORGANISATION

Management is committed to support our efforts to set high governance standards. Our CEO and his Management teamare focused on developing the Corporation into a world class organisation by adopting best practices in all aspects of ouroperations. Our Management’s unequivocal commitment to excellence has also resulted in a performance-based workculture in line with our business model to have a small, but motivated and committed team of professionals to carry outour core functions.

In order to achieve the highest of internal standards throughout all levels of the organisation, all members of our Boardand employees must conduct themselves within the parameters established by our codes on conduct and ethicalbehaviour as well as the law. Both members of the Board and employees are required to formally confirm compliance withsuch codes of behaviour and ethics.

We have also put in place mechanisms to deal with wrongdoing in the workplace in the form of the Policy for Disclosureof Information Concerning Wrongdoing in the Workplace (Whistleblowing Policy). The norm for such policies is forwhistleblowers to come from within the organisation but we have expanded it to include individuals from outside theorganisation, so that they may make reports on wrongdoing to a designated officer without the fear of reprisal.

CONCLUDING REMARKS

Going forward, we will continue to build upon the strong foundation that we have worked hard to establish. In a dynamicenvironment, with international best practices continually evolving, we will implement a continuous improvement processin order to meet our public policy objectives and to demonstrate to our stakeholders that we are fulfilling our mandateand are responsive to their needs. Presently, we have complied with 10 of the 15 standards of our Board GovernancePolicy. We have plans to put in place the necessary systems and practices to meet the last five standards.

NOTE OF THANKS

Although we are still a young Corporation, I believe that our progress thus far has surpassed expectations.This has beenachieved with the strong support and firm commitment of my fellow Board members, as well as our financial safety netpartner, Bank Negara Malaysia, all of whose advice and assistance have been invaluable. I would also like to particularlyrecognise the outstanding stewardship of our Chief Executive Officer, Mr Jean Pierre (JP) Sabourin, and the hard work,professionalism and dedication of Management and employees. To all of them, I would like to extend my sincere thanksand appreciation for contributing to the Corporation’s excellent performance. Ultimately, it is this kind of commitment,dedication and partnership that has been and will continue to be a major factor in our future achievements.

Tan Sri Dato’ Abdul Aziz bin Haji Taha

15 February 2007


MESSAGE FROM THE

CHIEF EXECUTIVE OFFICER

I am happy to report that 2006 was a great year of accomplishments aswe made significant progress in building a sound organisational foundationat PIDM.

Each year, the Corporation develops a Corporate Plan for the next threeyears which is approved by our Board of Directors. Our Corporate Plandescribes our strategic direction, highlights our business strategies, detailsour planned key initiatives by year and sets out our operating and capitalbudgets.The purpose of our Corporate Plan is to drive the organisation tofocus on the strategic and operating priorities and to put in place thenecessary systems, policies, practices and procedures to support us inensuring that we have the capacity and capability to achieve theCorporation’s statutory mandate.

We completed all of our key initiatives for 2006 as set out in our CorporatePlan for 2006-2008 on time and under budget and we also completed anumber of other initiatives that were planned for future years. As part of thisAnnual Report we provide an assessment of our performance against theCorporate Plan to provide a meaningful measure of achievement (see page 53).

In this regard, we have taken many steps to establish an organisationalstructure that adopts, as far as applicable, relevant standards and bestpractices. Our efforts can be seen in our work in developing our financialmanagement system, our internal controls, our information system anddata security, as well as our human capital policies, all in line with bestpractices. This is a continuation of the plan to develop a best practicedeposit insurer. Our legislation was designed by Bank Negara Malaysia(“BNM”) according to the Guidance for Developing Effective DepositInsurance Systems issued by the Financial Stability Forum (“FSF”). In late2005, we undertook a self-assessment of our compliance with the FSFGuidance and provided a copy of our report to the International MonetaryFund (“IMF”) team undertaking the Article IV Consultation.The IMF notedin its report that we complied with all relevant best practices.

In terms of our financial position, the Corporation continued to augment its financial resources in 2006. Our net surplus for the year totalled RM89.9 million as compared to our budget of RM84.9 million.The increasein net surplus was the result of our operating expenses being below budget.Our Deposit Insurance Funds now total RM122.5 million, made up ofRM111.2 million in the Conventional Deposit Insurance Fund and RM11.3million in the Islamic Deposit Insurance Fund.

We are also keenly aware that to develop best practices, one needs to hireand retain quality people with the right skills and attitude. During the year,we sought out and identified competent people to complement our team,and successfully increased our employee strength from 15 to 40.We havealso put in place many key policies to build a performance-based culture toachieve our commitment to professionalism and excellence and we shallcontinue our work to develop and retain the skills necessary to achieveour mandate, efficiently and effectively.

Our mandate and our business model contemplate sound and collaborativerelationships with a number of partners to help us achieve our objectivessuccessfully. A key partner is BNM since we have a common objective ofpromoting and contributing to the stability of the financial system. In 2006,we set out our respective responsibilities in a Strategic Alliance Agreement(“SAA”). Underpinning our SAA is our philosophy: “to cooperate andexchange information in furtherance of the MDIC Act”.

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Both organisations committed to continue to regularly exchange information and work collaboratively on matters relatingto our member institutions. I am also pleased to note that our SAA has been acknowledged by the InternationalAssociation of Deposit Insurers (“IADI”) as setting a world standard for strong inter-relationship arrangements betweendeposit insurers and supervisors.

Others have also assisted us in our work, including the National Audit Department, the Ministry of Finance and theTreasury Solicitor’s Office as well as the Attorney General’s Chambers. We acknowledge their contribution to ourwork and we thank them.

We have also worked closely with member institutions on a number of awareness activities, so that we may increase ouroutreach to the deposit-taking community.We regard it as a challenge to balance the need for robust regulatory requirementsto meet the best interests of depositors against excessive burdens on our member institutions. Accordingly we haveestablished a policy to undertake extensive consultations in the development of our regulations and laws both to provide ourmembers and the public with the opportunity to be heard, and to ensure that our regulations and laws are effective.

Apart from the need to achieve public confidence, we regard it our obligation as a deposit insurer to promote consumerprotection.We believe that empowering consumers, through education and awareness initiatives,will contribute to the stability of our financial system. Over the year, to support our efforts, we engaged in many public awareness activities as detailed inthe Section on Public Awareness and Education.

Our activities included the dissemination of some four million PIDM brochures in different languages to all branches of ourmember institutions, training representatives of our member institutions and conducting nationwide road shows, briefings,exhibitions and dialogues. During 2006, we also formulated a comprehensive multi-year communications strategy to help useducate segments of our stakeholders in a targeted and effective manner. Work in this area will continue in the years to come!

Amidst demanding organisation-building efforts, we also addressed our corporate social responsibilities. In September 2006,PIDM and its employees participated and donated to the Terry Fox Run, a charity run in aid of cancer research in Malaysia. Ourparticipation and contribution at this event also contributed to team building among our employees. The warmth and big-heartedness of Malaysians also made a deep impression amongst our IADI colleagues, who witnessed our involvement in thisarea during their visit to Kuala Lumpur for the IADI’s 15th Executive Council meeting.

FUTURE INITIATIVES

Our Corporate Plan for 2007-2009 sets our direction for the coming three years and will help us again focus our attentionon our priorities.The Corporate Plan details the strategic and operational initiatives that we will be undertaking during theperiod and we shall disclose our performance report against this Corporate Plan next year.This document also underscoresthe commitment of our Board and Management to be transparent and accountable for our actions. Highlights of thisCorporate Plan can be found in Section III of this Report.

As mentioned in our Chairman’s remarks, we shall continue to uphold and practise the key principles of good governance as thesewill be instrumental in moving our organisation towards fulfilling our mission and vision. In this connection, we plan to continueour work on implementing an enterprise risk management framework that will help us manage our significant risk exposures in a systematic and effective manner. Our ongoing work on a risk-based internal control framework will also be fully implemented.

There are a number of important initiatives in the pipeline that we shall accomplish over the next 24 months, including thedevelopment of frameworks for effective risk assessment, monitoring and intervention, and our differential premium systems,to be implemented by 2008. We also expect to issue several more regulations this coming year, including the ‘Terms andConditions of Membership’ and regulations relating to the information that should be provided to depositors by our memberinstitutions on deposit insurance matters.

Our successes to date have been made possible by the work of our Board of Directors and our employees.The Board has seta clear strategic direction for the Corporation and has approved business strategies and related initiatives by which we canmeasure ourselves. Our Board has also provided its unwavering support to Management.We thank our Chairman Tan Sri Dato’Abdul Aziz bin Haji Taha, and the members of our Board of Directors for their clear guidance and direction.We are pleasedto note that not only has our Board approved sound governance practices, it has also met its governance responsibilities head-on!

As to our employees, they have performed admirably and have shown their commitment and dedication to make PIDM a bestpractice organisation. I know our employees are all keenly aware of the importance of building a strong organisation for the benefitof depositors and the stability of Malaysia’s financial system.They are motivated and dedicated to the task at hand. I very much lookforward to continue working with them in the years to come.

Jean Pierre Sabourin

15 February 2007

TAN SRI DATO’ ABDUL AZIZ BIN HAJI TAHA (Chairman)

Tan Sri Dato’ Abdul Aziz bin Haji Taha is the Chairman ofPIDM. A Chartered Accountant by profession, he has hadextensive experience in the field of banking and finance.He has served in various capacities in both the public andprivate sectors. He was Governor of Bank Negara Malaysiabetween 1980 and 1985. He also held positions as Chairmanof the Capital Issues Committee and was a partner ofMessrs Kassim Chan & Co/Deloitte Haskins & Sells Malaysia,a member of the Foreign Investment Committee, theNational Development Planning Council, the InvestmentPanel of Lembaga Tabung Angkatan Tentera and the InvestmentPanel of Lembaga Tabung Haji. He was also a member of theBoards of the Malaysian Industrial Development FinanceBerhad and Perbadanan Nasional Berhad.

TAN SRI DATO’ SRI DR ZETI AKHTAR AZIZ

Tan Sri Dato’ Sri Dr Zeti Akhtar Aziz was appointedGovernor of Bank Negara Malaysia in May 2000. She hasbeen with the Central Bank since 1985, in a career spanningseveral senior positions in monetary and financial policiesand reserve management. During the height of the Asianfinancial crisis, Dr. Zeti was appointed as Acting Governor on September 1, 1998, and managed the successfulimplementation of selective exchange controls to restorestability and promote economic recovery in Malaysia. In BankNegara Malaysia, Dr. Zeti presided over the formulationof the Financial Sector Master Plan, a 10-year road mapfor the development of the Malaysian financial system.As Governor, Dr. Zeti oversaw the transformation of thefinancial system, notably the wide-ranging financial reforms,evolution of new financial institutions, strengthening of thefinancial markets and the rapid expansion of Islamic finance,and the transition to a managed float of the Ringgit exchangerate. Dr. Zeti received her B.Sc in Economics from theUniversity of Malaya and her Ph.D from the University ofPennsylvania. She has written extensively in the areas ofmonetary and financial economics, Islamic finance, capitalflows, macroeconomic management, financial reform andrestructuring. Dr. Zeti is actively involved in the developmentof Islamic finance and in regional financial cooperation.


TAN SRI DATO’ SRI IZZUDDIN BIN DALI

Tan Sri Dato’ Sri Izzuddin bin Dali is the Secretary General ofthe Treasury. He has wide experience in financial and publicsector management having served more than 30 years withthe Government in various capacities. Among others, he hasheld the posts of General Manager/Company Secretary atKuala Lumpur International Airport Bhd and Director of theBudget Division at Ministry of Finance and Secretary Generalat the Ministry of Works. He holds a Bachelor of Economicsfrom the University of Malaya and a Master of Arts(Economics) from Western Michigan University.

BOARD OF

DIRECTORS

MEMBERS AND PROFILE


TAN SRI DATO’ SERI HAJI MOHD AZMI BIN DATO’ HAJI KAMARUDDIN

Tan Sri Dato’ Seri Haji Mohd Azmi bin Dato’ HajiKamaruddin is the Chairman of the Financial MediationBureau. He has served in the Malaysian Judicial and LegalService as Magistrate, Senior Assistant Registrar andSessions Court Judge in several states in Malaysia, State LegalAdvisor and Deputy Public Prosecutor for the State ofKelantan and as State Legal Advisor for the State ofSelangor and Chief Registrar of the Federal Court. He waselevated to the position of a High Court Judge in 1970 andFederal Court Judge in 1980 before retiring from theJudiciary in 1999. He was also appointed by the Conferenceof Rulers as a Judge of the Special Court for three years.Other highlights of his career included being Arbitrator ofthe Kuala Lumpur Regional Centre for Arbitration, memberof the Malaysian Panel of Arbitrators which is affiliated to theParis-based International Chamber of Commerce Court ofArbitration, and Judge of the United Nations InternationalCriminal Tribunal for Rwanda.

DATUK DR SULAIMAN BIN MAHBOB

Datuk Dr Sulaiman bin Mahbob is the Director General ofthe Economic Planning Unit (“EPU”) of the Prime Minister’sDepartment. He was previously the President of theMalaysian Institute of Integrity, an agency established toimplement the National Integrity Plan. He is also an AdjunctProfessor (Economics) at the University of Malaya and at theUniversiti Utara Malaysia (Public Management and Law).His experiences are in the areas of national economicplanning, public finance, public policies and overall nationaleconomic management. He served the MalaysianGovernment for 33 years from 1971 till 2004 in variouscapacities including as Secretary General of Ministry ofDomestic Trade and Consumer Affairs, Under-Secretary(Economics) at Ministry of Finance, and Director in the EPUof the Prime Minister’s Department. He was also the firstChairman of Companies Commission of Malaysia. He wasonce Executive Director of Malaysian Institute of EconomicResearch and a Board Member of Malaysian IntellectualProperty Corporation, Malaysia International ShippingCorporation Berhad and Padiberas Nasional Berhad. Duringthe last financial crisis in 1998, he was the Head of theSecretariat of the National Economic Action Council.

DATUK DR ABDUL SAMAD BIN HAJI ALIAS

Datuk Dr Abdul Samad bin Haji Alias is a Fellow of theInstitute of Chartered Accountants in Australia. He hasextensive experience in auditing and accounting. He iscurrently Non-Executive Chairman of Ernst & YoungMalaysia, Chairman of Malaysia Venture Capital ManagementBhd and Chairman of Malaysia Debt Venture Bhd. He is a Board Member of Lembaga Tabung Haji, CompaniesCommission of Malaysia, Perbadanan Kemajuan IktisadNegeri Kelantan, Felda Holdings Berhad and TH PlantationsBerhad. He is also a member of the Malaysian Institute ofCertified Public Accountants and the Malaysian Institute ofAccountants. In 2006 Datuk Dr Abdul Samad received globalrecognition through the Association of Chartered CertifiedAccountants’ Award for Achievement in Asia.

MR MICHAEL WONG KUAN LEE

Mr Michael Wong Kuan Lee is a consultant to the legal firm,Messrs Shook Lin & Bok. He was a partner of the firm for 23years, out of which he was for 19 years its Managing Partner.He retired in December 1991. He also holds directorshipsin several public listed companies. He has acted as legaladvisor to various local and international organisations,including banks, merchant banks, securities and assetmanagement firms, Bank Negara Malaysia and theAssociation of Banks in Malaysia. He also held several publicappointments. He was a member of the Higher EducationAdvisory Council, a member of the Petaling Jaya Municipality,a member of Dewan Negara, a member of the Tunku AbdulRahman College Council and a member of the Board ofDirectors of Bank Negara Malaysia.


EXECUTIVE MANAGEMENT COMMITTEE (EMC)

1 S. Loganathan

2 Lai Wai Keen

3 Linden Leong

4 Jean Pierre Sabourin

5 Noorida Baharuddin

6 Md. Khairuddin Haji Arshad

7 Wan Ahmad Ikram Wan Ahmad Lotfi

8 Lim Yam Poh

9 Sherilin Mohd Ali (non-EMC: Secretar y to EMC)

ORGANISATION CHART


Analysts Malaysia, Senior Vice President of MarketDevelopment and General Manager of the Kuala LumpurOptions and Financial Futures Exchange. His last postingwas as the General Manager of the Labuan InternationalFinancial Exchange, a position he assumed in June 2001.He left the Bursa Malaysia group in October 2004 to set upWeR-1 Consultants Sdn Bhd in Malaysia, a consultancy firmspecialising in investor relations and media strategy with itshead office in Singapore. He holds a degree in BusinessAdministration from the Universiti Kebangsaan Malaysia.

LIM YAM POHGeneral Counsel and Corporate Secretary

Lim Yam Poh is the General Counsel and CorporateSecretary, who is responsible for all legal advice provided toPIDM as well as services such as contracting, negotiatingsettlements and litigation. She also ensures that PIDMcomplies with all areas of statutory requirement, includinglegislation specific to PIDM’s business and affairs such as theMalaysia Deposit Insurance Corporation Act 2005 and by-laws, other financial institutions legislation, and legislationrelating to being a statutory agency and regulated employer.She also performs the role of Corporate Secretary andprovides all legal services related to the Board. In particular,she provides input and advice to the GovernanceCommittee through which the PIDM Board of Directorsmonitors and addresses corporate governance matters.

She has over seven years’ experience in a leading law firmin Kuala Lumpur. She was with the Malaysian SecuritiesCommission between 1997 and 2000 and a senior managerat the Hong Kong Securities and Futures Commissionbetween 2000 and 2005. She holds an LLB (Hons.) degreefrom the University of Birmingham, England and has beencalled to the Bar of England and Wales and in Malaysia.

NOORIDA BAHARUDDINChief Internal Auditor

Noorida Baharuddin is the Chief Internal Auditor andheads the Audit and Consulting Services Division. Hermain responsibilities are to provide, on an ongoing basis,independent and objective assurance and consultingservices which are designed to improve the effectivenessand efficiency of PIDM’s operations, reliability and integrityof PIDM’s financial reporting as well as ensure PIDM’scompliance with applicable laws and regulations. She has15 years of experience in auditing, risk management andpolicy development gained through her career with anexternal audit firm, regulatory bodies and a public listedcompany. Her auditing experience includes external andinternal auditing as well as supervisory examination. Insupervisory examination, she had led examinations ofcapital market institutions and intermediaries licensed andsupervised by the Securities Commission, as well asoffshore financial and insurance institutions licensed by theLabuan Offshore Financial Services Authority (“LOFSA”). Inrisk management, she had been involved in the developmentand implementation of enterprise-wide risk management forLOFSA. She had also been attached to the Islamic Financial

Services Board where she assisted in the development ofGuiding Principles of Risk Management for the InstitutionsOffering Islamic Financial Services.

She holds a Bachelor of Business Degree (Accounting) fromthe University of Tasmania, Australia. She is a CertifiedPractising Accountant (Australia) and a Certified FinancialPlanner with the Financial Planning Association of Malaysia.

LINDEN LEONGGeneral Manager, Human Capital

Linden Leong is the General Manager of Human CapitalDivision. She is responsible for ensuring the right humancapital strategies and plans are established for an effectiveutilisation of resources and policies that engage andcreate the appropriate work culture and environment,as well as the right enablers to promote and sustainworkforce productivity.

She has 12 years of consulting and management experiencein the field of human planning and performance across a wide range of industries, which include organisations such as KPMG, Hay Group, MNI Insurance and Affin Bank.In her consulting career, she has led and delivered changemanagement and process improvement projects where sheadvised and delivered changes in the areas of recognition and performance management, organisation design anddevelopment as well as career development for governmentagencies, multinational companies and local organisations.As a human resource (“HR”) practitioner, she has worked with top executives and senior management teams to realign the right HR strategies for capacity building throughrecruitment and selection, incentive design, the BalancedScorecard and succession management. She holds a degree inBusiness Management from Monash University,Australia.

SHERILIN MOHD ALISenior Legal Counsel

Sherilin Mohd Ali is the Senior Legal Counsel of PIDM and isthe Secretary to the Executive Management Committee. Shehas over nine years’ work experience in areas ranging fromlegal and secretarial practice, corporate banking to assetmanagement. Prior to joining PIDM, she was a member of the legal team at Pengurusan Danaharta Nasional Berhad,Malaysia’s first asset management company. She holds an LLB(Hons.) degree from the University College of London,England and has been called to the Bar in Malaysia.

EXECUTIVE MANAGEMENT COMMITTEE:

MEMBERS AND PROFILE

JEAN PIERRE SABOURINChief Executive Officer

Jean Pierre (JP) Sabourin was appointed as the first ChiefExecutive Officer (“CEO”) of PIDM in August 2005. He hasunparalleled expertise in all aspects of deposit insurance andis very much in demand internationally. His assistance hasbeen widely sought after by other countries in establishingand improving their deposit insurance systems. Among hismany achievements, he chaired the Financial StabilityForum’s international study and working groups on depositinsurance and the first ever APEC Policy Dialogue onDeposit Insurance held in Kuala Lumpur. In May 2002, he ledthe establishment of the International Association of DepositInsurers and was elected its first Chair of the ExecutiveCouncil and President, a position he still holds. He wasemployed by the Canada Deposit Insurance Corporation(“CDIC”) from 1976, and held various positions within CDICbefore becoming its President and CEO in 1990, until hisretirement in 2005. Under his leadership, CDIC has becomerecognised as a world leader in deposit insurance. He is alsoChairman of the Advisory Committee of the InternationalCentre for Leadership in Finance. He holds a Master ofBusiness Administration from the University of Toronto.

MD. KHAIRUDDIN HAJI ARSHADGeneral Manager,Insurance, Risk Assessment and Monitoring

Md. Khairuddin Haji Arshad is the General Manager ofInsurance, Risk Assessment and Monitoring Division. He isresponsible for the analysis and monitoring of the risk level ofPIDM member institutions as well as the intervention andfailure resolutions of troubled member institutions. Prior to hiscurrent position, he served Bank Negara Malaysia for 15 yearsin the Bank Regulation Department and Islamic Banking andTakaful Department. He has extensive experience in Islamicbanking and finance and is currently a member of the MalaysianAccounting Standards Board working group on Islamic financialtransactions. He also provided technical assistance to variouscountries in developing their Islamic banking industry as well as presented papers at domestic and international seminars.He holds an Accounting degree from the InternationalIslamic University, Malaysia.

WAN AHMAD IKRAM WAN AHMAD LOTFIChief Financial Officer

Wan Ahmad Ikram Wan Ahmad Lotfi is the Chief FinancialOfficer responsible for the overall financial and administrative

affairs of PIDM. In particular,he is accountable for the direction,management and control of the accounting and treasuryfunctions as well as functions related to information andtechnology system management, office administration,internal policies and controls, and strategic planning.A Chartered Accountant, he is a member of the Institute ofChartered Accountants in Australia and the MalaysianInstitute of Accountants. He started his profession withTelekom Malaysia Berhad before pursuing his professionalaccounting career with KPMG in Melbourne, Australia. Uponhis return to Malaysia, he joined Tahan Insurance MalaysiaBerhad as the Chief Internal Auditor and was later appointedas its Chief Financial Officer in March 2004. He holds aBachelor of Commerce degree from the University ofMelbourne, Australia.

LAI WAI KEENGeneral Manager, Policy and International

Lai Wai Keen is the General Manager of Policy and InternationalDivision. She is responsible for PIDM’s key policy areas andinternational relations. She was one of the members of theDeposit Insurance Task Force of Bank Negara Malaysia whichwas set up to establish the deposit insurance system.The TaskForce was responsible for developing policies that take intoconsideration the specific needs of the Malaysian financialsystem and Malaysian depositors.

She has 20 years of regulatory experience with Bank NegaraMalaysia, including in bank regulation, communications,international relationships and negotiations. She holds adegree in Business Administration from the University ofMalaya and a law degree from the University of London.

S. LOGANATHANGeneral Manager,Communications and Public Affairs

S. Loganathan is the General Manager of Communicationsand Public Affairs Division. He is responsible forcommunications and public relations as well as managingPIDM’s public awareness programmes. He has some 25 yearsof experience in the financial media and the securitiesindustry. He started off his career as a journalist first withBernama and then with the Business Times, where hespecialised in corporate, stock market and securitiesindustry news. He joined the Bursa Malaysia group(previously known as the Kuala Lumpur Stock Exchange) in1990 and rose through the ranks, holding various positionsincluding Manager of the Research Institute of Investment

SECTION 1:INTRODUCTION


INTRODUCTION INTRODUCTION

Perbadanan Insurans Deposit Malaysia (“PIDM”) is a statutorybody established under the Malaysia Deposit InsuranceCorporation Act 2005 (“MDIC Act”) to administer thedeposit insurance system in Malaysia.We report to Parliamentthrough the Minister of Finance and we are governed by aseven-member non-executive Board of Directors.

CORPORATION BACKGROUND

Our objectives are mandated under the MDIC Act.We areto administer a deposit insurance system. We are also toprovide insurance to depositors against the loss of part or all deposits held at member institutions, and promote orcontribute to the stability of the financial system, acting in amanner that minimises costs to the financial system. Ourmandate also requires us to provide incentives for soundrisk management in the financial system.

Deposits (principal and interest or return) are insured up toRM60,000 for each depositor in each member institution. Inthe event of a failure of a member institution, we will pay theaffected depositors promptly in respect of the deposits insured.

Islamic and conventional deposits are separately insured.We are funded by our member institutions, licensed banks,which pay premiums separately in respect of Islamic andconventional deposits. Accordingly we manage two depositinsurance funds separately, namely, an Islamic DepositInsurance Fund and a Conventional Deposit Insurance Fund.Our Islamic Deposit Insurance Fund is managed and investedin accordance with Shariah requirements as set out in theMDIC Act.

We work closely with Bank Negara Malaysia (“BNM”) aspart of the nation’s safety net to promote and protect thestability of the financial system.

We have wide-ranging powers to carry out our mandate,including the necessary power to take steps to reduce oravert risks to the financial system and to intervene onceBNM has determined that a member institution has ceased,or, is likely to cease, to be viable. Given the terms of ourmandate, an important aspect of our work is to monitor andmanage risks within our membership.

We are an active member of the International Associationof Deposit Insurers (“IADI”) and the first deposit insurerto be admitted as an Associate Member of the IslamicFinancial Services Board.

OUR REPORTING BENCHMARKS

We are committed to an objective, balanced andunderstandable annual report. Our Report includes bothfinancial and non-financial performance information,which provides our stakeholders with a clear picture ofour performance this year.

Our Board of Directors has reviewed this Report and notesthat in line with our commitment to high standards ontransparency, this Report complies with all the recommendations of the International Federation of Accountants on annualreporting in the Governance in the Public Sector: A GoverningBody Perspective (“IFAC Study”).

THE SECTIONS IN OUR ANNUAL REPORT

This year’s Annual Report is set out in the following sections:

• CORPORATE GOVERNANCE (SECTION II)

The theme in this Annual Report is “StrengtheningGovernance; Building Credibility”. As a public sectorentity, we are guided by international standards andother best practices on governance disclosures. In 2006,we implemented our Board Governance Policy, containingthe standards and principles in line with internationalrecommendations and best practices to which our Boardis committed to follow.

In the Report, we include a Statement on Governancewhich has been approved by our Board of Directors.This Statement includes a description of the work of theBoard in relation to each of the standards in the BoardGovernance Policy.

Our Board reviewed the state of our internal controlsand its effectiveness. We also include a Statement on Internal Control, in line with best practices in theprivate sector.

• MANAGEMENT’S DISCUSSION ANDANALYSIS (SECTION III)

This section provides an overview of our currentoperating and membership environment and our financialhighlights. It discusses our progress against our approvedCorporate Plan in 2006 and includes a description ofour involvement in community work. It also outlines ourCorporate Plan 2007-2009 and highlights some key areasof focus going forward.

• FINANCIAL STATEMENTS (SECTION IV)

This section contains details of our financial results for 2006 and our financial position. Our financialstatements comply with the applicable internationalfinancial reporting standards.

• ARTICLES (SECTION V)

In this section,we include an article about our governanceframework, as well as an article on our compliance with best practices, with a table containing a summary onour self-assessment of compliance with best practices indeposit insurance.

An ongoing key initiative for us in the coming years isthe implementation of an enterprise risk managementframework within our organisation.We include an articleon why it is important to us and the relevance of enterpriserisk management to member institutions.

• PUBLIC AWARENESS AND EDUCATION(SECTION VI)

This section describes our key initiatives to buildawareness about deposit insurance.

• CALENDAR OF EVENTS (SECTION VII)

In this final section, we describe our key events in 2006.This covers activities within our functions.

SECTION II:CORPORATE GOVERNANCE

Statement on Governance

Statement on Internal Control

31 32

Committee, the Governance Committee and theRemuneration Committee, whose terms of reference are intheir respective Charters.

In developing our corporate governance framework, we areguided by the core principles originally recommended in the1992 Cadbury Report.These principles are:

• openness (or transparency);

• integrity (including independence); and

• accountability.

These principles have been used, in the context of publicsector bodies2, to mean the following:

• Openness – “… to ensure that stakeholders can haveconfidence in the decision-making processes and actionsof public sector entities, in the management of theiractivities, and in the individuals within them. Being openthrough meaningful consultation with stakeholders andcommunication in full, accurate and clear informationleads to effective and timely action and stands up tonecessary scrutiny.”

• Integrity – “… comprises both straightforward dealingand completeness. It is based upon honesty andobjectivity, and high standards of propriety and probityin the stewardship of public funds and resources, andmanagement of an entity’s affairs. It is dependent onthe effectiveness of the control framework and onthe personal standards and professionalism of theindividuals within the entity. It is reflected both in theentity’s decision-making procedures and in the qualityof its financial performance reporting.”

• Accountability – “… is the process whereby the publicsector entities, and individuals within them, areresponsible for their decisions and actions, includingtheir stewardship of public funds and all aspects ofperformance, and submit themselves to appropriateexternal scrutiny. It is achieved by all parties havinga clear understanding of those responsibilities, andhaving clearly defined roles through a robust structure.In effect, accountability is the obligation to answer fora responsibility conferred.”

OUR BOARD GOVERNANCE POLICY

One of the key foundations put in place in 2006 is our BoardGovernance Policy. In this Policy, the Board documented itscommitment to the standards and principles that will guide itswork in governing the Corporation. As noted earlier, thesestandards were developed by reference to internationalstudies and domestic best practices.

We are immensely proud to be among the very feworganisations in Malaysia to set out and publish such principlesand standards, and to assess ourselves against these principlesand standards. This shows our Board’s commitment tofollow sound corporate governance. It also allows us todemonstrate how we are being governed to the highest ofprinciples and standards.

OUR BOARD’S RESPONSIBILITIES ANDSTANDARDS ON GOVERNANCE

RESPONSIBILITIES

The MDIC Act sets out the broad role of the Board ofDirectors. It is “responsible for the conduct of the businessand affairs of the Corporation and shall exercise all powersand do all acts which may be exercised or done by theCorporation.” Each Director is required, in the words of theMDIC Act, to act honestly and in the best interest of theCorporation and to use reasonable diligence in thedischarge of the duties of his or her office. The Board’sresponsibilities are also set out in our position descriptionsfor the Board and its members.


STATEMENT ON GOVERNANCE STATEMENT ON GOVERNANCE

This Statement summarises our Board of Directors’progress in its work on governance in 2006 against ourBoard Governance Policy. It also includes the following:

i) a description of the principles behind our governanceframework;

ii) a detailed narrative report against these standards; and

iii) a detailed description of the Board’s involvement in thework of the Corporation.

The overriding objective of this Statement on Governanceis to give sufficient disclosure so that the public and ourstakeholders can assess the Corporation’s governancepractices and performance.

INTRODUCTION

PIDM operates within the legal framework set out in theMalaysia Deposit Insurance Corporation Act 2005 (“MDICAct”) and is accountable to Parliament through the Ministerof Finance. The MDIC Act describes the Corporation’sobjects, powers and duties, as well as the broad terms for theadministration of deposit insurance systems.

It is pertinent to note that, as a statutory body, there is norequirement that we comply with codes on corporategovernance. For example, the principles and best practicesset out in the Malaysian Code of Corporate Governance andthe Green Book on Enhancing Board Effectiveness (“GreenBook”) by the Putrajaya Committee on Government-LinkedCompanies (“GLC”) High Performance (“PCG”) are notapplicable to us.

Although there are no specifically recognised standards orbest practice guidelines on governance that statutory bodiesare required to comply with, we have drawn from the manyuseful principles and recommendations from the privatesector as well as the public sector, with necessaryadaptations in our context.

Our Board Governance Policy was approved during the yearand is attached in the Appendix. The Board Governance Policysets out our Board’s commitment to high standards ofgovernance. These standards are sourced from variousinternational studies or recommendations on governance

relevant to public sector bodies1, as well as the Malaysian Codeon Corporate Governance and the Green Book. In the publicsector, we have used international benchmarks, in particular,the recommendations of the Governance in the Public Sector:A Governing Body Perspective by the International Federationof Accountants (August 2001) (“IFAC Study”).

This Statement on Governance, therefore, relates to compliancewith the standards set out in the Board Governance Policy.

OUR STATEMENT

Our Board is pleased to report that, out of the 15 standardsin the Board Governance Policy approved in June 2006, theBoard has already fully complied with 10 standards. Withregard to standards in other areas, such as risk managementand internal control (Standards No. 11 to 13), the Board hasfulfilled its responsibilities as far as is possible given our earlystage of development as a start-up organisation. Some workremains in relation to the five other standards includingsuccession planning for senior management (Standard No. 8)which will be undertaken in 2007. Full development of theseareas is a priority in our agenda for our work in 2007, as wedescribe further below.

The following subsections:

i) describe the principles behind our governance framework;

ii) include a report against these standards; and

iii) describe the Board’s involvement in the work of theCorporation in detail.

The overriding objective of this Statement is to givesufficient disclosure so that the public and our stakeholderscan assess the Corporation’s governance practices andperformance against our governance policies.

OUR PRINCIPLES

As stated in our Annual Report 2005, our goal has been toestablish sound foundations by incorporating the highest ofstandards in corporate governance in the Corporation’sbusiness and affairs. This work began in 2005 with theestablishment of our three Board Committees - the Audit

2 Governance in the Public Sector: A Governing Body Perspective by the International Federation of Accountants (August 2001) (‘IFAC Study’)1 The list of sources are found in the Board Governance Policy.

STANDARDS OF GOVERNANCE

The following describes the governance structures and the work of the Board against the standards laid out in the BoardGovernance Policy.

1. Independence of the Board

2. Boardeffectiveness and governanceresponsibilities

The Board will obtain and maintainan understanding of the Corporation’sobjects and powers, as well as of itsgovernance responsibilities.

To achieve this, the Board will:

i) develop and maintain approaches tofulfilling those responsibilities and willevaluate, objectively, on a regular basis,its effectiveness in doing so;

ii) ensure that the Corporation hasarrangements for the orientation ofnew Directors and ongoing trainingappropriate to the Board’s governanceresponsibilities and needs.

Board members will exerciseindependent judgment.

This independence is enshrined in the MDIC Act.The broad powers and duties of the Board are setout in the MDIC Act. There are no executiveDirectors on the Board, and the roles of theChairman and the Chief Executive Officer(“CEO”) are deliberately separated. The CEO isnot a member of the Board. Members of theBoard have used their independent judgment toact in the interests of the Corporation at all times.

STATEMENT ON GOVERNANCE

Standard No. Standard Progress Report In 2006

i) The Corporation has adopted position descriptionswhich clearly define the responsibilities and rolesof the Board, the Chairman of the Board andthe CEO. In addition, the expected relationshipbetween the Chairman and the CEO is documented.

Further, the Board has developed an evaluationmethodology whereby it will evaluate theperformance of Directors by reference to therespective position descriptions above, in linewith best practice recommendations. Theevaluation process for assessing the Board’seffectiveness, adopted in 2006, is described onpage 43 and the evaluation forms will be madeavailable on our website. In February 2007,the Board undertook an assessment of theperformance of the Board and its Committees,and has come up with action plans to addressareas for further development.

ii) On 21 September 2006, members of the Board met for an education session on the Green Book with distinguished subject matterexperts as guest speakers for the occasion.Our governance standards and practices have been


STATEMENT ON GOVERNANCE


compared with the recommendations in theGreen Book and, we find that - where relevant inour context as a statutory body - we comply with its recommendations. In May 2006 andFebruary 2007, we also used the checklist in the IFAC Study as a tool to help us identify areasin our governance arrangements for furtherdevelopment. We are pleased to note that wehave complied significantly with this checklist.

We have also established specific orientation andeducation sessions during 2007 and training will bemade available to members of the Board.

3. Roles andresponsibilities of committees

Where the Board appoints a committee,it will establish the responsibilities andauthority of Board Committees, as well asaccountability requirements for them.

The responsibilities and authority of the BoardCommittees are set out in their respectiveCharters, which are published in the Appendix.The work of the Committees in 2006 is describedon (page 41).

4. Boardcomposition and succession

The Board constitution should maintainindependence, and there should be anappropriate mix of skills and capabilities,given the objectives and strategic directionof the Corporation.

To achieve this, the Board will, in consultationwith the CEO:

i) develop a profile of desirable skillsand capabilities that would bestenable the Board to fulfill theirresponsibilities and advise theMinister of Finance of the desired mixthat should be sought in filling upcomingnon ex-officio Board vacancies;

ii) have a Board succession plan torecommend to the Minister of Financethe orderly turnover of Directors.

The MDIC Act sets out the composition of ourBoard. Biographies of the Board members(see page 17) and the composition of the threeBoard Committees that assist with Board workappear on page 41.These biographies demonstratethe high level and range of public and private sectorexperience amongst the Board members, which isessential to our work.

i) As part of the strategy for succession planning,the Board has approved the methodology foridentifying skills gaps, if any, on the Board. Thismethodology will help us to determine, on aregular basis, if there is an appropriate mix of skills,experience and knowledge on the Board to meetthe needs of the Corporation.The Board has alsoapproved a policy on the hiring of independentadvisors.This policy allows for, among other things,the Board to retain independent expertise andadvice if such skills are not available on the Board.In addition, the Board approved the process forrotating committee members on the basis of theirexpertise, interests and availability.

ii) Should a vacancy arise, the Board would be in aposition to identify and recommend to theMinister of Finance the appropriate candidate orcandidates for appointment to the Board.


6. Appointment ofsenior corporateofficers

The Board will appoint the seniorcorporate officers of the Corporation(other than the CEO) and determine theirterms of office and compensation.

In 2006, the Board approved the appointment oftwo senior corporate officers and the officers’terms and conditions of service, namely theGeneral Counsel and Corporate Secretary andthe Chief Financial Officer.


5. Roles andresponsibilities of the ChiefExecutive Officer

The responsibilities and accountability ofthe Chairman and the CEO should beclearly distinguished and documented.

In this connection, the Board will:

i) develop a position description for the CEO;

ii) develop a set of corporate objectives atleast annually for which the CEO isresponsible for achieving and evaluatethe performance of the CEO againstthose objectives;

iii) establish an accountability relationshipfor the CEO to the Board.

i) The Board has approved the position descriptionfor the Chairman and the CEO.

ii) Each year, the CEO sets his key performanceindicators against the corporate objectives whichare then approved by the Board. Performanceagainst those objectives is tracked regularly and,at the end of the year, the CEO reports to theBoard on his performance against thoseobjectives. The CEO has reported his progressagainst the approved corporate objectives for2006 and the Board has evaluated the sameafter reviewing the recommendations of theRemuneration Committee.

iii) In this connection, the position description forthe CEO has been established; the process hasbeen established whereby the Board approvesthe set of corporate objectives for the CEOannually, for which the CEO is responsible andagainst which his performance is evaluated; andthere exists a strong accountability relationshipbetween the CEO and the Board through theMDIC Act setting out the CEO’s responsibilitiesand reporting relationship with the Board,reinforced by position descriptions.



7. Compensationof officers

The Board will satisfy itself, on a regularbasis, that the compensation of theCorporation’s officers and employees are consistent with the sustainableachievement of the Corporation’s objects,the prudent management of its affairs andthe risks to which it is exposed andadherence to its policies and procedures.

The Board will review the compensationprogramme for all directors, and makerecommendations to the Minister ofFinance in that regard.

The Board has approved the compensation andbenefits policy, as well as performance managementpolicy for the employees of the Corporation.Thesepolicies are consistent with our business model,which requires us to build a lean and specialisedteam with the continued ability to sustain theachievement of our objects.

The Board has also reviewed the compensationprogram for Directors and made recommendationsto the Minister of Finance. Approval of the Ministerof Finance has been received to provide payment ofallowances for Committee work. The Board willregularly review the compensation programme toensure it is kept current.

8. Successionplanning

The Board will plan for the succession ofthe CEO and review succession plans forkey senior management.

The Corporation has only been in existence for 16months. Accordingly succession planning for keysenior management is on the agenda for the Board’sconsideration in 2007.

9. Standards ofbehaviour andethics

The Board will establish standards ofconduct and ethical behaviour forDirectors and for the Corporation’sofficers and other employees, and obtain,on a regular basis, reasonable assurancethat the Corporation has an ongoing,appropriate and effective process forensuring adherence to those standards.

The Board has established standards of conductand ethical behaviour for not only officers andemployees, but for Board members as well.Theseinclude the Code of Business Conduct and Ethicsand the Conflict of Interest Code. Reports ofcompliance with such Codes are required underthe Remuneration Committee Charter as well asthe Audit Committee Charter to the respectiveCommittees. The Board has also established thePolicy for Disclosure of Information ConcerningWrongdoing in the Workplace, also known as theWhistleblowing Policy (see Appendix). This willenable any suspected wrongdoing in theworkplace to be reported, without reprisal, at anearly stage. The Audit and RemunerationCommittees have, in accordance with therespective Charters, received and reviewedreports on compliance with the relevant Codesas part of year-end work and have reportedcompliance to the Board on the same.



10. Significantrisks to theCorporation

The Board will:

i) obtain an understanding of the principalrisks of the Corporation’s business;

ii) ensure that appropriate and prudent riskmanagement systems to manage theserisks have been implemented and arereviewed regularly; and

iii)obtain reasonable assurance, on aregular basis, that systems are beingadhered to and the risks affecting the Corporation continue to beeffectively managed.

i) In 2006, the Board received and reviewedregular reports on the soundness of memberinstitutions, and assessed risks to our businessand affairs on an ongoing basis.

ii) In 2006, the Board also approved action plansfor developing and implementing an enterpriserisk management (“ERM”) framework, which isone of our key areas of focus in our CorporatePlan 2007-2009 (page 61). In September 2006,some of our Board members attended a oneand a half day seminar on enterprise riskmanagement, conducted by subject matterexperts. They were also able to draw from the experiences of other members of theInternational Association of Deposit Insurers(“IADI”) who attended the seminar.This will bea key area of work going forward.

iii)The Board received reports from Managementwhich conclude that systems are in place andare being adhered to.

11. Controlenvironmentand internalaudit

The Board will ensure that the Corporationhas a control environment that supports theprudent management of its operations andof the risks to which it is exposed (includingrisks to the attainment of its objects) andhas effective policies and practices to assurethe integrity of internal controls andmanagement information systems.

In this connection the Board will:

i) allocate resources for, and establishan internal audit group, setting outits mandate;

The Board has overall responsibility for theCorporation’s system of internal control and risk management.

In 2006, among other things:

i) we established an internal audit function throughour Audit and Consulting Services Division.Wehired our Chief Internal Auditor, after consultingwith the Audit Committee Chairman and theChairman of the Board. The Board has alsoapproved the Audit and Consulting ServicesDivision Charter. Appropriate resources havebeen provided to the Division to ensure that itcan fulfill its responsibilities;



ii) approve its audit plan each year; and

iii) seek, from the internal audit group, ona regular basis, reasonable assuranceregarding the monitoring of, and thecompliance with internal controls, theintegrity of the system, and thatappropriate action is being taken toaddress any significant weaknesses orbreakdowns identified.

ii) the Board has approved the three-year auditplan of the Audit and Consulting ServicesDivision. Appropriate resources have beenprovided to the Division to ensure that it canfulfill its responsibilities;

iii) the Board has been kept updated on thedevelopment and implementation of theCorporation’s new financial management system.This new financial management system hasbeen documented and appropriate accountingprocedures have been implemented;

iv) the Board approved an information technologygovernance framework, that provides thecontrol environment in which informationtechnology initiatives will also be developed.This project will be aligned with our work on theERM framework; and

v) a project being undertaken in 2007 is to developand implement an ERM system within PIDM.

Our plan for the immediate future is to continue tofocus on our work on our internal control frameworkand apply a risk-based approach. Going forward,once our internal control framework has been fullyimplemented, the Board will be able to obtainreasonable assurance on the compliance with internalcontrols and the integrity of the system.

12. In control The Board will obtain, on a regular basis,reasonable assurance that the Corporationis “in control”.

The concept of being “in control” refers to a statewhere the Corporation’s operations are subjectto effective governance by the Board and arebeing managed in accordance with an ongoingstrategic and risk management process in anappropriate control environment and wheresignificant weaknesses related to those matterswill be identified, addressed and brought forwardto the Board’s attention.

The Board’s Statement on Internal Control is onpage 44. Our plan for the immediate future is tocontinue our focus on the development of internalcontrols and our ERM project.





15. Review of BoardGovernancePolicy

The Board will annually review the BoardGovernance Policy to ensure that itremains responsive to the circumstancesand needs of the Corporation and that itcontinues to reflect the legislation towhich the Corporation is subject to, theCorporation’s mandate, guidance onmatters of governance specific to statutorybodies and recognised best practices.

Although the Board Governance Policy wasrecently put in place in 2006, we have compared itwith the recommendations of the Green Book.We are pleased to report that our BoardGovernance Policy and the practices of our Boardare very much in line with the recommendationsof the Green Book. We also regularly track ourprogress in governance against the IFAC checklist.

14. Effectivecommunication

The Board will ensure that the Corporationcommunicates effectively with the public,Bank Negara Malaysia (“BNM”), otherstatutory bodies or regulators, depositors,member institutions and other relevant parties.

The Board monitors the effectiveness of Management’scommunications with our stakeholders. In 2006,the Board approved:

i) the Communications Policy that applies to theCorporation as a whole; and

ii) an Integrated Communications Plan for2007-2011.

The Board also receives updates on theCorporation’s public awareness initiatives and areport on developments in implementing theCommunications Plan at each Board meeting. TheBoard also receives reports on the consultationprocesses and approaches in developing regulationsand policies.

13. Strategicmanagementprocess

The Board is responsible for reviewingand overseeing the development of and approving a strategic plan anddirection for the Corporation, taking intoaccount the opportunities and risksfacing the Corporation.

To fulfill this responsibility, the Board will:

i) periodically assess the Corporation’sobjects to ensure their continuingrelevance and, if thought appropriate,propose changes for consideration bythe Minister of Finance;

ii) adopt a strategic planning process;

iii) at least annually, approve operatingobjectives and strategies, the operatingbudget, capital budget, borrowing plan,corporate plan and premium rates thatare appropriate and prudent in light ofthe Corporation’s objects, current andanticipated environment, risks, resourcesand financial position;

iv) regularly evaluate the Corporation’sperformance in implementing itsapproved plans, and budgets; and

v) obtain, on a regular basis, reasonableassurance that the Corporation has aneffective strategic management process.

The Board plays an important role in strategy setting.In line with current best practices, the strategicmanagement process involves both the Board andManagement, and the process is co-owned by theBoard and Management. In 2006, the Board approvedthe new Corporate Plan 2007-2009 that sets out ourpriorities for the coming years and the financial plansfor 2007.

In this connection:

i) the Board will periodically review the Corporation’sobjects and make recommendations, if warranted;

ii) a strategic planning process has been adoptedwhereby the Board and Management set out thestrategic direction of the Corporation;

iii) as part of the corporate planning process,Management develops a detailed Corporate Planthat sets out the operating objectives, the strategiesand budgets, including premium rates in line withthe Corporation’s objects, current and anticipatedenvironment risks, resources and financial position;

iv) the Board is presented with quarterly performancereports which detail both the status of the financialposition and performance to set approvedinitiatives; and

v) the Board holds a strategic management sessioneach year and considers the effectiveness of thestrategic management process.


WORK OF THE COMMITTEES

The three Board Committees are: the Audit Committee, the Remuneration Committee and the Governance Committee. In2006, there were six Audit Committee meetings, two Remuneration Committee meetings and three Governance Committeemeetings.As a matter of practice, each of the Committees tracks its progress and sets out its action plans against its principalresponsibilities in its Charter at each meeting.

COMPOSITION OF COMMITTEES

Tan Sri Dato’ Abdul Aziz bin Haji Taha(Chairman)

Tan Sri Dato’ Sri Dr Zeti Akhtar Aziz

Datuk Dr Sulaiman bin Mahbob

Datuk Dr Abdul Samad bin Haji Alias(Chairman)

Tan Sri Dato’ Sri Izzuddin bin Dali

Mr Michael Wong Kuan Lee

Tan Sri Dato’ Sri Dr Zeti Akhtar Aziz(Chairman)

Tan Sri Dato’ Seri Haji Mohd Azmi binDato’ Haji Kamaruddin


Remuneration CommitteeGovernance CommitteeAudit Committee

The Audit Committee:The principal responsibilities of the Audit Committee areset out in its Charter (see Appendix).The Audit Committeemust meet at least four times a year and must satisfy itselfthat the financial statements follow approved accountingprinciples and give an accurate account of theCorporation’s financial affairs in as comprehensible a way aspossible. It must satisfy itself that the internal and externalauditors have no cause for concern about any aspect ofthe accounts or of the Corporation’s control and auditprocedures. It advises the Board on other financial

reporting, accounting and internal control issues as well asfinancial management.The Audit Committee also plays a riskoversight function.

The following are some of the key activities of the AuditCommittee during 2006:

• reviewing and tracking performance to Corporate Plan2006-2008 and reporting thereon to the Board;

• reviewing the Corporate Plan 2007-2009 andrecommending it to the Board for approval;

THE WORK OF THE BOARD AND ITS COMMITTEES

MEETINGS AND ATTENDANCE

In 2006, four Board meetings were held, and the Board members also met to discuss and set the strategic direction for2007-2009 in September 2006.The following sets out the attendance at the Board meetings of each Board member:

Tan Sri Dato’ Abdul Aziz bin Haji Taha (Chairman)



Tan Sri Dato’ Seri Haji Mohd Azmi bin Dato’ Haji Kamaruddin


Datuk Dr Abdul Samad bin Haji Alias


1

1

-

1

-

-

1

4

4

2

4

4

3

4

Datuk Dr Abdul Samad bin Haji Alias (Chairman)



6

1

6

• reviewing the Code of Business Conduct and Ethics, theWhistleblowing Policy and recommending the same forBoard approval;

• reviewing the Conflict of Interest Code and recommendingthe same for Board approval;

• reviewing the Audit and Consulting Services DivisionCharter and Audit Plans and recommending the samefor Board approval;

• reviewing legal matters having a potential impact onPIDM’s financial statements, as well as PIDM’s compliancewith law and ethical matters; and

• reviewing the financial statements and the Management’sDiscussion and Analysis for this Annual Report, as well asthe Annual Report in its entirety.

The attendance at the Committee meetings of each Committee members is as follows:

The Remuneration Committee:The mandate of this Committee is set out in its Charter (seeAppendix). It must meet at least twice a year and is requiredunder the Charter to review and make recommendations tothe Board on a range of human resource issues, such ascompensation, compliance with human resource-related legalrequirements, personnel policies, training, succession planning,complaints and other human resource-related matters.

Among the Remuneration Committee’s main areas of businessduring 2006 were:

• reviewing and recommending to the Board for approval,an appropriate compensation and benefits policy for theCorporation that is in line with the Corporation’s businessmodel and the need to attract and retain talents;

• reviewing and recommending to the Board for approval,a performance management policy, again in line with theneeds and work culture of the Corporation; and

• overseeing the development of a human capital strategy.

The Governance Committee:The mandate of this Committee is set out in its well-definedCharter (see Appendix). Its principal responsibilities includeensuring that appropriate structures and processes are in placeto provide effective oversight of and direction for theCorporation’s activities. Among its primary roles are —ensuring the establishment of best practice governance policiesand high governance standards, reviewing the appropriatebalance of skill, experience and knowledge of the Board andidentifying skills gaps — as well as recommending futureappointments for non ex-officio positions on the Board.

During 2006, the Governance Committee’s main activitiesincluded benchmarking the Board’s and the Corporation’sgovernance policies and practices against international bestpractices and establishing such policies and practices. Its work

also entailed reviewing and recommending the following to theBoard for approval:

• a policy on rotation of Board Committee members;

• the documentation on the respective roles andresponsibilities of the Board, the Chairman and the ChiefExecutive Officer and the standards expected of them;

• the evaluation process for effectiveness of the Board,Boardmembers and Committees;

• the process for a skills gap analysis, as part of thesuccession planning for the Board;

• the set of Corporate By-Laws that regulate the conductof the affairs of the Board; and

• a policy to allow Board members to obtain independentlegal and other advice where necessary.

Board of DirectorsNumber of meetings

attended out of 4meetings held

Strategic PlanningSession

Audit Committee MembersNumber of meetings attended

out of 6 meetings

Tan Sri Dato’ Sri Dr Zeti Akhtar Aziz (Chairman)

Tan Sri Dato’ Seri Haji Mohd Azmi bin Dato’ Haji Kamaruddin


2

2

2

Remuneration Committee MembersNumber of meetings attended

out of 2 meetings



Appointment and remuneration of Board MembersThe Governor of BNM and the Secretary General of theTreasury hold ex-officio positions as Directors under theMDIC Act.All other members of the Board are appointed bythe Minister of Finance for a term of three years under theMDIC Act.As noted before, all Directors are non-executivemembers of the Board.The allowances for members of theBoard are approved by the Minister of Finance, as requiredby the MDIC Act. In 2006, Directors received a totalremuneration for Board and Committee work, in line withthe approval of the Minister of Finance, of RM146,000.

Evaluation of the effectiveness of the Board and itsCommitteesThe Board has also adopted a process for the purposes ofassessing the effectiveness of the Board, its Committees andthe performance of individual Board members respectively.The process includes the completion of three evaluationforms, which have been developed by reference to the BoardGovernance Policy, Committee Charters, and the positiondescriptions of the Chairman and Board Members. Some ofthe questions have been adapted from the Green Book andguidelines by the Global Corporate Governance Forum.Thethree evaluation forms will be published in the Corporation’swebsite. Under the process, which is led by the Chairman ofthe Board, each Board member fills in the evaluation formsand meets at a dedicated Board meeting to assess theeffectiveness of the Board and the respective Committees.For 2006, individual Board members have completed therelevant evaluation form for the purposes of self-assessmentof his or her performance as a Director.

Compliance with Laws and EthicsAs a statutory body, we are required to comply withvarious statutes. We confirm that the Corporation is incompliance with the laws that apply to it as a statutorybody as well as an employer.

Among the key provisions we have complied with arethe following:

i) the MDIC Act requires that we submit an annual report tothe Minister of Finance,who will cause the annual report tobe tabled in Parliament. In March 2006, we submitted our

Annual Report 2005 to the Minister of Finance within thestatutory time frame required by the MDIC Act; and

ii) the Statutory Bodies (Accounts and Annual Reports)Act 1980 also requires us to comply with applicablefinancial reporting standards in Malaysia.

TransparencyIn keeping with standards of good governance andtransparency, we publish our key policies and practices.Among others, we have published the following, in BahasaMelayu, Chinese, English and Tamil; in hard copies as wellas in our website:

• Corporate Plan 2007-2009;

• Board Governance Policy;

• Procurement, Contracting and Outsourcing Policy;

• Policy for Disclosure of Information ConcerningWrongdoing in the Workplace (“WhistleblowingPolicy”); and

• Communications Policy.

Our Committee Charters are publicly avai lable(see also Appendix).

To promote accessibility to information, we are committedto a language regime that responds to public needs i.e. the fourmajor languages, where necessary. Translation into otherlanguages is considered whenever a particular document is ofa wider interest.We also adopt a policy to consult extensivelyon all key regulations having an impact on our stakeholders.This is intended to allow our stakeholders and the public tomake comments on the same, and to ensure transparency inour decision-making process.

In keeping with our aims to meet high standards ontransparency, our Annual Report also fully complies withrecommendations on annual reporting in the IFAC Study.

This Statement is to provide the stakeholders and users ofour Annual Report with meaningful, high-level informationabout the Corporation’s risk management processes andits system of internal control to support our efforts inbuilding strong governance.

INTRODUCTION

In our first 16 months of operations, we have been workingon establishing our risk management framework andimplementing a sound internal control system.

In 2006, among other steps, we established the Audit andConsulting Services (“ACS”) Division and we set in placea number of key processes, including the implementationof a comprehensive financial management system withembedded internal control measures.We have establishedcertain processes for identifying, evaluating and managingthe significant risks of providing deposit insurance.We havealso initiated steps towards implementing a systematicapproach towards risk management within PIDM, inparticular, our Board has given its full support for thedevelopment of our Enterprise Risk Management (“ERM”)framework going forward.

As described below, our work in these areas will necessarilyescalate over the next few years, as our operations becomemore developed and, as a matter of course, more complex.

RESPONSIBILITIES FOR RISKMANAGEMENT AND INTERNALCONTROLS

The Board and senior management acknowledge theirresponsibilities for PIDM’s risk management and internalcontrol environment and its effectiveness.

This is evidenced by our Board Governance Policy whichwas established in 2006. The Board Governance Policyplaces overall responsibility on the Board to obtain anunderstanding of the principal risks of the Corporation’sbusiness and to ensure that there are appropriate andprudent risk management systems to manage these risks.The Board is also to ensure that the Corporation has a

sound internal control environment and is responsible forthe review of its adequacy and integrity. Finally, under theBoard Governance Policy, the Board is to obtain, on aregular basis, reasonable assurance that the Corporation is“in control”. This Policy also sets out the roles andresponsibilities of Management in this regard.

We also have three Committees, namely the AuditCommittee, the Governance Committee and theRemuneration Committee, governed by their respectiveCharters (see our Statement on Governance, page 31).TheseCommittees serve as governance tools to assist the Board inensuring that the internal controls are working.We have alsoestablished other important internal controls processes,with the roles and responsibilities between Board andManagement being clearly delineated through documentationof the position descriptions for the Board, Board members,the Chairman and the Chief Executive Officer.

AUDIT AND CONSULTING SERVICES(ACS) FUNCTION

In line with the terms of Standard No. 11 of the BoardGovernance Policy, the Board has allocated resources fora strong and independent internal audit function. In thefirst quarter of 2006, the ACS Division was established tosupport the Board, the Audit Committee and Managementto discharge their responsibilities.

Since the establishment of the internal audit function, theBoard has approved an Audit and Consulting ServicesCharter. The functions of the ACS Division are set out in its Charter. The ACS Division is responsible for providingindependent and objective assurance and consulting servicesby evaluating and improving the effectiveness of controls,risk management, business and governance processes. Underthe Board Governance Policy, the Board may also seek fromthe ACS Division, on a regular basis, reasonable assuranceregarding the monitoring of, and the compliance withinternal controls, the integrity of the system, and thatappropriate action is being taken to address any significantweaknesses or breakdowns identified.

STATEMENT ON INTERNAL CONTROLSTATEMENT ON GOVERNANCE

Tan Sri Dato’ Abdul Aziz bin Haji Taha (Chairman)



3

1

2

Governance Committee MembersNumber of meetings attended

out of 3 meetings


• the Board has approved the Code of Business Conductand Ethics and the Conflict of Interest Code which setout the expectations required of employees andDirectors on standards of behaviour and ethicalconduct;

• the Board has approved the Policy for Disclosure ofInformation Concerning Wrongdoing in the Workplace(“Whistleblowing Policy”) that establishes channelsof communication for individuals to report suspectedbreaches of the law or other improprieties byindividuals within the organisation. These Codes andPolicies have been and will continue to becommunicated to our employees and they haveconfirmed compliance with the same in 2006;

• the Charters for our three Board Committees arecomprehensive, setting out their principal roles andresponsibilities (see Appendix) and helping to identifythe key policies and procedures to be brought to theBoard for approval. All key policies and proceduresare subject to regular review to ensure they remaincurrent and relevant. Among other matters, therelevant Charters require that Management report oncompliance with applicable laws and ethics to theRemuneration Committee and the Audit Committee;

• Executive Management Committee meetings are heldregularly to discuss operational issues at managementlevel and to ensure we focus on the achievement ofcorporate initiatives; and

• our dedicated unit, the Insurance, Risk Assessment andMonitoring Division, works closely with BNM toidentify and constantly monitor our operatingenvironment and the financial condition of ourmember institutions. In this regard, the Board receivesregular reports on member institutions so as to enableus to assess the risks to our deposit insurance funds.

REVIEW OF SYSTEM OF INTERNALCONTROL

The Board has reviewed the effectiveness of PIDM’spolicies, procedures and initiatives which were implementedin 2006 that formed part of the system of internal control.The Board’s review was based on the reports from variousBoard Committees and Management and its review workincluded the following:

• the Board considered, on a regular basis, the reports ofvarious Board Committees.These included the report onthe review by the Audit Committee on compliance withapplicable laws and ethics, as well as the report from theRemuneration Committee on compliance with keyhuman capital policies and related laws;

• the Board considered, on a quarterly basis, the utilisationof resources as compared to the approved budget;

• the Board considered, on a quarterly basis, financialreports, which are also regularly provided to theTreasury; and

• the Board considered, on a quarterly basis, theupdate and progress on Management’s overallperformance against approved initiatives as set out inthe Corporate Plan.

Based on the systems, processes and practices in place, theBoard is pleased to report that internal controls wereadequate in 2006, given the Corporation’s stage ofdevelopment and given the extent of our currentoperations. The Board is also pleased to report that, forthe year 2006, there was no reported incidence ofweakness or failure in the internal controls embedded inthese policies, procedures and initiatives.

The Board has approved a comprehensive audit plan,which sets out areas which will be subjected to audit from2006 to end of 2008.The ACS’ audit plan for 2006 to 2008was deliberately made consistent with our aim of buildingstrong foundations and governance. Our approach to auditplanning for 2006 to 2008 was largely driven by ourcorporate objectives and key supporting initiatives in ourCorporate Plan for the same period.We also have manualson internal audit and consulting services with clearprocedures for planning, field work, reporting and followup activities.

Reports on performance to the audit plan will allow theAudit Committee to carry out its oversight function andreporting to the Board. This will enable us to moveprogressively towards a risk-based audit planning approachtogether with the development and implementation of ourERM framework.

CURRENT STAGE OF DEVELOPMENT

Given that the Corporation was recently established, ourinternal control and risk management frameworks are stillunder development.

To promote a sound internal control environment, we arecurrently developing an internal control framework toenable PIDM to enhance its control strategy in responseto the assessment of various risks in achieving PIDM’scorporate objectives. The internal control frameworkforms part of our key initiatives for our Corporate Plan2007-2009. Our system of internal control will bedesigned to provide reasonable assurance regarding theeffectiveness of our risk management, business andgovernance processes.

The Board has also approved the approach forimplementing an ERM framework for the organisation.ERM will be a key initiative for the Corporation starting in2007. The implementation of this framework will ensurethat our significant risk exposures will be managed on anenterprise-wide and consolidated basis (see page 62).

Going forward and together with the implementation ofthe Corporation’s internal control and ERM frameworks,

the Board’s annual review of the system of internal controlwill encompass the assessment, monitoring and reportingof the Corporation’s risks.

INTERNAL CONTROL ENVIRONMENTOF PIDM IN 2006

In 2006, the following key policies and processes wereestablished as part of our system of internal control:

• we have an organisation structure with clearly definedresponsibilities and accountabilities between the Boardand Management.There is a clear separation of roles andresponsibilities between the Board and Management.Theposition of the Chairman is a non-executive positionwhile the Chief Executive Officer is not a member of ourBoard. We also have documented position descriptions(approved by the Board) for the Chairman, the Boardand the Chief Executive Officer. We have defined andapproved the performance objectives for the ChiefExecutive Officer and each of the heads of the operatingunits of PIDM;

• we have developed and implemented policies andprocedures on financial, operational and informationsystems with embedded internal controls. These willcontinue to be developed and enhanced, and wherenecessary, updated to ensure they remain current,relevant and effective;

• the Board has received comprehensive information thatis relevant and timely to help them make more informeddecisions. As an example, the Board received detailedquarterly reports of the financial performance of PIDMas well as performance reports against our approvedCorporate Plan. Quarterly financial statements were alsosent to the Treasury;

• our Procurement, Contracting and Outsourcing Policyhas been approved and published, consistent withGovernment efforts to enhance transparency ofprocurement processes in the public sectors and GLCs.The Policy on Authorised Signatories puts limits andcontrols on the authority for financial matters;

STATEMENT ON INTERNAL CONTROL

STATEMENT ON INTERNAL CONTROL

SECTION III:MANAGEMENT’S DISCUSSION

AND ANALYSIS

Our Operating Environment

Review of 2006 Operations

2006 Financial Overview

Summary of Our Corporate Plan 2007-2009

Our Management’s Discussion and Analysis includes adiscussion on our operating environment. It also includesan analysis of our progress against our business strategiesand key initiatives as set out in our Corporate Plan 2006-2008 and a description of our social work, a financialoverview, and an outline of our Corporate Plan 2007-2009highlighting key areas of focus.

OUR OPERATING ENVIRONMENT

Our mandate in section 4 of the Malaysia Deposit InsuranceCorporation Act 2005 (“MDIC Act”) sets out our objects as follows:

i) to administer the deposit insurance system (Islamicand conventional);

ii) to provide insurance against loss of part or all deposits;

iii) to provide incentives for sound risk management inthe financial system; and

iv) to contribute and promote public confidence in thestability of the financial system.

In pursuing the objects in (i) and (ii), we are to act in amanner as to minimise costs to the financial system.

The breadth of our mandate demands vigilance from us inassessing our operating environment and managing ourinherent risks in providing deposit insurance.The followingis a description of our operating environment.

ECONOMIC ENVIRONMENT AND TRENDS

The economy in 2006 remained strong despite somechallenges and inflation averaged 3.6% for the year.

Economic growth is expected to remain stable in 2007and with investor confidence continuing to remain strong.Significant factors that are expected to contribute toeconomic growth are sustained private consumer spending,higher tourist spending and investments from the NinthMalaysia Plan. Interest rates and inflation are also expected

to remain low. Overall, these factors are expected to providea favourable operating environment for the banking sector.Matters that could impact the performance of our memberinstitutions include a disorderly adjustment of global currentaccount imbalances, any unexpected sudden slowdown inthe US economy or sharp fluctuations in oil prices.

OUR MEMBERSHIP

In line with the stable economic growth, our memberinstitutions showed overall improvements in 2006.There was sustained loan growth, continued improvementin asset quality, higher quarter-to-quarter profitabilitygrowth, ample liquidity and healthy capitalisation.As at end-December 2006, our member institutionsregistered a 6.6% growth in loans, advances and financing(December 2006: RM585.4 billion, December 2005: RM549.3billion) against the 8.9% growth registered in 2005. Theoverall asset quality also continued to improve with the netnon-performing loans (“NPL”) ratio (3-months classification)falling to 4.8% as at end-December 2006 (December 2005:5.8%). In absolute terms, the net NPL has also improved andstood at RM26.8 billion as at December 2006 (December2005: RM30.4 billion).

The member institutions’ overall capitalisation hashowever declined slightly as mergers and loans growthtook place amidst improving asset quality. Our memberinstitutions’ level of capitalisation, as measured by the risk-weighted capital ratio and core capital ratio as at 31 December 2006, remained strong at 12.5% (December2005:13.6%) and 9.7% (December 2005:10.5%) respectively,well above the Basel Capital Accord minimum requirementof 8%. Meanwhile, during the year, our member institutionshave fully complied with the minimum liquidity requirementsas laid down by Bank Negara Malaysia (“BNM”), with aliquidity surplus of 2.7 times as at December 2006 (December2005:2.7 times) under the less-than-one-week bucket.

With sustained loans growth and continued improvement in asset quality, the financial performance of our memberinstitutions has also improved. Based on the September2006 position, the unaudited profit before tax has expandedby 9.9% (annualised) from full year 2005, supported by netinterest income and also strong growth in non-interestincome. Return on assets has marginally increased to 1.3%over the same period (December 2005:1.2%).

MANAGEMENT’S DISCUSSION AND ANALYSIS

49 50

During the year, one finance company (Kewangan BersatuBerhad) was absorbed into a commercial bank, twocommercial banks merged into a single entity (CIMB BankBerhad) and three Islamic banking windows weretransformed into Islamic subsidiaries (EONCAP IslamicBank Berhad, Affin Islamic Bank Berhad and AmIslamicBank Berhad).A new Islamic banking licence was issued toAl Rajhi Banking and Investment Corporation (Malaysia)Berhad bringing our total membership to 32 (2005:33).As at 31 December 2006, we have a total of 10 Islamicbanks and 22 conventional banks (seven of which operateIslamic windows). Please see Appendix for the listing ofour member institutions as at 31 December 2006.

We are funded by premiums assessed on total insureddeposits placed at our member institutions as at31 December of the preceding assessment year. PIDMreceives no Government funding or appropriations.For 2006, we collected annual premiums assessed at a flatrate of 0.06% (2005:0.06% of total insured deposits or0.02% of total deposits; subject to a minimum premiumo f R M 2 5 0 , 0 0 0 ) o n to ta l i n sured depos i t s a s a t31 December 2005 as well as first premium assessed onour new member institution, Al Rajhi Bank and the threeIslamic subsidiaries. The table below illustrates thecomposition of deposits held at our member institutionsas at 1 September 2005 and 31 December 2005.


As at 31 December 2005, total deposits of memberinstitutions grew by 3.2% to RM661.7 billion from RM641.4billion as at 1 September 2005. By end-November 2006, totaldeposits of our member institutions registered furthergrowth of 12.4% to RM743.9 billion, of which 12.5% wasIslamic deposits and 87.5% conventional. Up to November2006, total conventional deposits recorded an increase of11.7% or RM68.3 billion largely due to the growth in fixeddeposits of 8.8% or RM26.9 billion and demand deposits by9.0% or RM8.5 billion. In line with the expansion of Islamicbanking in Malaysia, total Islamic deposits held at ourmember institutions recorded an impressive growth of17.5% or RM13.9 billion, attributable primarily to theincrease in demand deposits of 31.2% or RM4.6 billion andgeneral investment deposits of 8.5% or RM2.7 billion.

Total insurable deposits of our member institutions grew by 6.9% to RM519.8 billion as at 31 December 2005 fromRM486.1 billion as at 1 September 2005. The bulk ofconventional banking and Islamic banking insurable depositswas in the form of fixed deposits and general investmentdeposits respectively. Total insured deposits held by ourmember institutions decreased marginally as at 31 December2005 by 0.5% to RM165.2 billion from RM166.1 billion as at1 September 2005.This comprises 91.5% or RM151.2 billionof conventional banking insured deposits and 8.5% orRM14.0 billion of Islamic banking insured deposits.


Position as at 31 December 2005 1 September 2005

Islamic

RM billion (%)

Conventional

RM billion (%)

Total

RM billion (%)

Total

RM billion

Total Deposits

Total Uninsurable Deposits

Total Insurable Deposits

Total Insurable DepositBalances in Excess ofRM60,000

Total InsuredDeposits

79.1

13.8

65.3

51.3

14.0

582.6 (88.0%)

128.1 (90.3%)

454.5 (87.4%)

303.3 (85.5%)

151.2 (91.5%)

661.7 (100%)

141.9 (100%)

519.8 (100%)

354.6 (100%)

165.2 (100%)

641.4

155.3

486.1

320.0

166.1

(12.0%)

(9.7%)

(12.6%)

(14.5%)

(8.5%)

Profile of deposits placed at member institutions on an aggregated basis

51 52

REVIEW OF 2006 OPERATIONS

Our Corporate Plan 2006-2008 sets out our businessstrategies and our key initiatives for 2006. This sectionreports our progress against these strategies and keyinitiatives as detailed in our Corporate Plan 2006-2008 andalso describes our social work during the year.This reportshould be read in conjunction with our Corporate Plan2007-2009 which is publicly available.

INTRODUCTION

Our Mission is to achieve our mandate in an effectiveand efficient manner. Accordingly, our business modelcontemplates a lean but highly skilled workforce, withthe ability to tap on an external network of expertisewhen necessary.

Business strategies

Our Corporate Plan 2006-2008 sets out four long-termbusiness strategies to achieve our mandate, taking intoaccount our business model. These are Readiness, SoundBusiness and Financial Practices, Public Awareness andStrong Partnership.

Laying the foundations

The focus of our tasks as described in our Annual Report2005 for 2006 was laying the foundations to meet ourCorporate Vision, including the following:

i) developing people with the right skills sets; and

ii) developing and implementing appropriate systems,policies and best practices to administer an effectivedeposit insurance system.

OUR WORK IN 2006

In 2006, we have worked in line with the priorities set in theCorporate Plan 2006-2008.

During our early months of existence, we have naturallyfocused on building our organisational capacity and capability.Given the stable operating environment in Malaysia, we havenot been distracted by environmental changes from carryingout our initiatives as planned. During the year, we filled theremaining key positions to complete our management team.We worked towards building a results-oriented workforcethat will meet our standards of professionalism and excellence.

Key among our efforts in 2006 has been our work on publicawareness. We say key, because education on depositinsurance is fundamental to public confidence in the financialsystem and to enhancing knowledge about our role asthe national insurer of deposits. We have also startedbuilding strong networks with others to help us in ourwork. This, in line with our business model, allows us toleverage on the depth of experience and expertise availableelsewhere. It will, eventually, help us perform more efficientlyand effectively.This work will continue going forward.

At the same time, we have crystallised many fundamentalconcepts and philosophies that will drive the way we carry outour core functions going forward. We have also developedconcept papers for the implementation of regulations in areas such as the ‘Terms and Conditions of Membership’,dissemination of information on deposit insurance and thedifferential premium systems framework. Our Board has alsoapproved many plans and frameworks as well as key policies,practices and processes, including our approach to governance,enterprise risk management (“ERM”), IT governance,communications, internal audit and human capital.


RISK MANAGEMENT PRACTICES OF OURMEMBER INSTITUTIONS

As financial institutions licensed under the Banking andFinancial Institutions Act 1989 and the Islamic Banking Act1983, our member institutions continue to be subject tothe rigorous supervisory monitoring and risk assessmentby BNM. Among others, the prudential regulations andsupervisory requirements (which include the 25 CorePrinciples of Effective Banking Supervision and the Baselcapitalisation requirements) serve as minimum benchmarksfor our member institutions. Our member institutions arecontinuing to focus their efforts on strengthening theirrisk management systems and practices in preparationfor the adoption of Basel II. It is envisaged that whencompleted, the implementation of Basel II will furtherstrengthen the resilience of our member institutions.

EXPECTED IMPACT OF REGULATORYINITIATIVES

We also anticipate that some of our own initiatives in thenear future will have an impact on member institutions.

In providing incentives for sound risk management, we will,in 2008, be implementing our Differential Premium Systemsto assess premiums based on the risk profiles of ourmember institutions (see page 62).

Working with BNM, we intend to further encourage soundfinancial and business practices through our ‘Terms andConditions of Membership’ which is being developed and wetarget to have it in place by the end of 2007. The law alsopermits us to impose a premium surcharge on memberinstitutions that breach any of these terms and conditions.

CONCLUSION

Overall, our operating environment remains stable andprovides us with the opportunity to continue to build onour capacity and capability as well as to complete ourinitiatives as set out in our Corporate Plan 2007-2009.



HIGHLIGHTS OF OUR PERFORMANCE

The following are the highlights of our performance in 2006 against the four long-term strategies outlined in ourCorporate Plan 2006-2008. We have met all of our key initiatives identified in our Corporate Plan 2006-2008 and havealso completed a number of other initiatives during the year.

Note:The symbols correspond to those against the initiatives set out in our Corporate Plan 2006-2008 and have the following meanings:Priority for 2005/2006, Action plan developed in 2006 for implementation in 2007/2008. Other initiativesP AP OI

Business Strategy Key Initiatives inCorporate Plan 2006-2008

(Completed in 2006)

Ongoing Activities(Work initiated in 2006,

and will be ongoing)

Readiness

Being prepared tofulfill our role asdeposit insurer bybeing ready and alertto events affectingmember institutionsand having the abilityto anticipate, react and manage risks.

Sound Businessand FinancialPractices

Ensure that policies,procedures andreporting are in placesuch that we canfulfill our mandate inan efficient andeffective manner.

• Executed Strategic Alliance Agreement (“SAA”)with BNM on information sharing

• Implemented a new integrated financial management system

• Issued ‘Guidelines on Total Insured Deposits’

• Developed ‘Disclosure Requirements for JointAccounts and Trust Accounts Regulations’

• Board approved concept and framework forregulations on ‘Terms and Conditions ofMembership’

• Board approved concept and framework forimplementation of ERM

• Commenced development of a payoutframework AP

AP

AP

P

P

P

P

• Risk assessments of member institutions

• Development of payoutframework

• Ongoing consultation with BNMon policies and other matters

• Development of ERM policies and processes AP

OI

AP

AP

Board approved key governance policies andprocesses including:

• Board Governance Policy

• Documented position descriptions to delineateroles of Board and Management

• Corporate By-Laws

• Codes of Business Conduct and Ethics andConflict of Interest Code

• Whistleblowing Policy

• Board evaluation process

• Board succession-skills gap analysis

In addition, Board also approved:

• Concept and framework for two differentialpremiums systems

• Concept and framework for implementation of ERM

• Internal audit function and charter P

AP

AP

AP

AP

P

P

P

P

P

See also our Statement on Governance (page 31)

• Continued to provide regularfinancial statements and updatesagainst Corporate Plan for Board

• Continued to benchmark keypolicies, processes and proceduresbenchmarked against best practices

• Continued to provide employee development and training (including on ethics and conduct)as well as to upgrade technicalskills and knowledge

• Continued to provide Directors’ education sessions OI

P

OI

OI

• Audit plans of Audit and Consulting ServicesDivision

• Human Capital Strategy, Compensation and Benefits and Performance ManagementPolicies

• IT Governance Approach

• Communications Policy

Other work completed:

• Board approved the concept on requirementsfor disclosure of information to depositors

• Conducted Directors’ education session on‘Enhancing Board Effectiveness’

• Implemented the process for consulting thepublic and other stakeholders on proposedregulations

• Carried out employee development and training(including on ethics and conduct) as well asupgrading technical skills and knowledge

• Set up Asset and Liability Committee (“ALCO”)terms of reference and policies

Annual reviews:

• Completed review of compliance with laws andethics related matters

• Review of Committee Charters

• Effectiveness of Board and Committeeevaluations

• Effectiveness of internal control P

P

P

P

P

P

P

OI

AP

P

P

P

AP

• Carried out regular monitoring,assessments and reporting on thecondition of member institutions

• Commenced enhancement of IT Infrastructure (Phase 1)

• Continued development of Business Continuity Plan OI

P

AP

Public Awareness

Increase publicawareness and explainthe benefits andlimitations of depositinsurance.

• Integrated Communications Plan for 2007-2011approved

• Survey on public awareness on deposit insurancecompleted

• Stakeholders’ education by briefing memberinstitutions and other regulators, the public,affected industries, lawyers and accountants onproposed regulations P

P

AP

• Continued stakeholders’ education

• Carried out regular dialogue andinformation-sharing sessions withmember institutions P

P




(Completed in 2006)





(Completed in 2006)



55 56

of sound corporate-wide risk management systems withintheir own organisations.

As noted in our Annual Report 2005, we have beensteadily working at developing our differential premiumsystems, with the aim of introducing the systems by 2008.The systems are to allow us to differentiate and assesspremiums based on individual bank risk profiles, for bothIslamic and conventional member institutions. Our Boardhas approved the concept and framework for the Islamicand conventional differential premium systems in 2006.The project is in full swing and a Differential PremiumSystems Working Committee has been established to movethe work further and to fill in the details of the systems.

Gearing up

We are also working on more development in the areas ofrisk assessment, interventions and failure resolutionmethods and related information technology systems.During the year, we had guest speakers from severalcountries to transfer knowledge and expertise on depositinsurance.We made study trips to leading deposit insurersand regulators around the world to draw on theirexperiences as well as to gather intelligence about theirmethodologies and approaches. In 2006, we also begandeveloping a payout framework that will enable us to makeexpeditious payouts to depositors when required.

Regulations and guidelines

We have made headway in our work to make the MDIC Acteffective. In 2006, we issued ‘Guidelines on Total InsuredDeposits’ for member institutions to help them calculate thetotal insured deposits and premiums payable. We have alsosecured the gazetting of our ‘Disclosure Requirements forJoint Accounts and Trust Accounts Regulations 2007’, aftermany rounds of informal consultations with stakeholders anda final public consultation in June 2006. We have alsocommenced working on several concepts for other keyregulations and guidelines, which will go through similarconsultation processes.

BUSINESS STRATEGY 2 : SOUND BUSINESSAND FINANCIAL PRACTICES

Our aim is to have sound business and financial practicesas a foundation for achieving operational effectiveness andefficiency. Key policies, procedures, systems, practices andreporting are being put in place such that we candemonstrate that the Corporation is well governed andwell managed.

Sound governance

During the year, we have made considerable progress inour efforts to build our governance framework, as wecommitted to do in our past Annual Report and ourCorporate Plan 2006-2008. Among the significant policies

and processes put in place were the Board GovernancePolicy, Corporate By-Laws, our Code of Business Conductand Ethics and the Whistleblowing Policy. A comprehensivereport on these is found in our Statement on Governance(page 31). Our Directors, too, are clearly committed toleading by example, as demonstrated by their considerablework on governance.

To strengthen our business and financial practices, we havedeveloped and implemented an integrated financialmanagement system. We have also established anALCO and a Policy on Procurement, Contracting andOutsourcing, as well as formulated our IT governanceapproach. Where possible , we benchmarked ourframeworks, systems and processes against internationalbest practices (see also our Article on Compliance withBest Practices, page 104).

Developing a culture of excellence

Our business model places great importance on thequality and attitude of our workforce.We are pleased withthe implementation of a comprehensive compensation andperformance management system, both of which have beendesigned to motivate our people and instill a strong cultureof excellence.We will continue to build a knowledgeable and competent workforce through ongoing developmentand training.

Corporate planning and overall performancemanagement

We have achieved all of our key initiatives in our CorporatePlan 2006-2008 within our stated financial plan. Please refer to2006 Financial Overview of this Section for further details.Our Corporate Plan 2007-2009 builds upon the previousCorporate Plan 2006-2008 and carries on with the samestrategic objectives. Going forward, to ensure we remainfocused on achieving our plan, we have adopted the BalancedScorecard methodology to manage and measure PIDM’soverall performance to set targets.

BUSINESS STRATEGY 3 : PUBLIC AWARENESS

Educated and informed stakeholders are key to oureffectiveness. Our business strategy is to establish soundpublic awareness and educational programmes to explainthe benefits and limitations of the deposit insurance system.

Ongoing engagement with stakeholders

A major area of ongoing work is public awareness.As such, we have taken many varied measures to provideinformation about us and our work as well as to makeinformation accessible (for details, see the Section on PublicAwareness and Education, page 123).


Strong Partnership

Enhance relationshipswith our partnersincluding BNM, otherregulators, membersand service providersto achieve ourmandate moreeffectively andefficiently.

• Trained officers of member institutions includingtheir own trainers

• Performed corporate social responsibility byparticipating in Terry Fox Run

• SAA with BNM signed and implemented

• Conducted briefings to other regulators,lawyers, accountants, banking and securitiesindustry

• Briefed Attorney General’s Office,TreasurySolicitor’s Office and the Treasury on proposedregulations and related concepts

• Hosted Executive Council meeting and otherInternational Association of Deposit Insurers(“IADI”) meetings

• Participated in other international conferences P

P

P

P

P

OI

P

• Conducted regular briefings toAttorney General’s Office,TreasurySolicitors’ Office and the Treasury

• Participated in internationalconferences

• Shared and exchanged depositinsurance knowledge and expertiseglobally through IADI

• Study visits to established depositinsurers for exchange of knowledge

• Consulted regulators, memberinstitutions and the public onproposed regulations

• Built relationships with key suppliersand service providers P

P

P

P

P

P

OUR PROGRESS IN DETAIL

Our progress, in more detail, is discussed below.

BUSINESS STRATEGY 1 : READINESS

This business strategy aims to ensure that we are ready andalert to events affecting us and our member institutions, andto ensure we have the capacity and capability to anticipate,actively assess and manage risks to the deposit insurance funds.

Promoting risk management and insurancerisk assessment

Our mandate requires us to assess the risks of providingdeposit insurance and be ready to intervene and deal with afailure of any member institution. Accordingly, we have

been working at building our capacity and capability in thearea of insurance risk assessments and monitoring. In 2006,we committed to monitor our operating environment.Working closely with BNM, we kept abreast of issuesaffecting our member institutions. Our role requires us tokeep a continuous eye on the profile of our membership, aswell as to conduct regular assessments of the risks thatmember institutions might pose.

Providing incentives for sound risk management inthe financial system

As part of our work to promote sound risk management,we organised an ERM seminar in conjunction with theIADI Executive Council Meeting in Kuala Lumpur inSeptember 2006. This also helped us to prepare for theimplementation of our ERM framework, as well asto educate our member institutions about the importance

MANAGEMENT’S DISCUSSIONAND ANALYSIS



We continued to enhance our toll-free multilingual call centreestablished since 2005, as well as our website.We also madeavailable our brochures, in several languages, in every branchof our member institutions, and conducted nationwidebriefings, road shows, exhibitions and held dialogues with ourmember institutions and other stakeholders.

We have also gone out to actively engage our stakeholdersand the general public, and provided training to more than1,000 representatives of member institutions to expand ouroutreach to members of the public. We also conducted 20information sessions for both member institutions and thepublic across Malaysia and have participated in severalconsumer forums and conducted surveys.

Long-term integrated communications programme

Our Integrated Communications Plan for 2007-2011 was amajor initiative in 2006 and was completed and approved byour Board in September 2006.This plan will be rolled out in2007 and will help us use channels of communicationseffectively, as well as create greater awareness and educateour audience in a targeted manner.

Surveying for effectiveness

We are also aware of the need to make certain that we canmeasure our actual performance by setting performancetargets. In December 2006, the results of our public surveyshowed that 13% of respondents were aware of depositinsurance and 4% were aware of our existence. This levelof knowledge confirms that it is imperative for us toprovide public awareness and education on our depositinsurance system.

Surveys will drive our advertising campaigns and ensure thatthe strategies chosen are aligned and effective.We will continueto carry out surveys on a periodic basis to gauge the successof our work in this area.

BUSINESS STRATEGY 4 :STRONG PARTNERSHIP

Strong partnerships and affiliations provide us with theinvaluable networks that will assist us to fulfill ourmandate effectively.

Strategic alliance and sharing with Bank Negara Malaysia

In 2006, we executed an SAA with BNM.This agreement isto help us to coordinate our respective functions andactivities as well as promote the timely exchange of relevantinformation. We have an excellent and cooperativerelationship with BNM and we are confident that we willcontinue to work well together in our respective roles.

Our consultative process

Strong partnerships also mean working with memberinstitutions and others in a consultative and transparentmanner.To ensure broader acceptance and effectiveness ofour regulations, guidelines or rules, we are committed to aconsultative process with stakeholders so that we mayget constructive feedback on our proposed regulations,guidelines or rules.

Drawing on external expertise and experience

We are an active member of IADI. Our Chief ExecutiveOfficer is also the Chairman of IADI and President of itsExecutive Council. Over the year, we have also been fortunateto be able to draw on the expertise and experiences ofother established organisations, in particular, leading depositinsurers and regulators in jurisdictions such as Canada and theUnited States. By way of exchange, we have also shared ourdeposit insurance model, its underlying philosophy and ouruniqueness, especially in providing Islamic deposit insurance.

In September 2006, we also hosted the IADI ExecutiveCouncil and other meetings in Kuala Lumpur. In conjunctionwith these meetings, we held an ERM seminar led by subjectmatter experts. We invited representatives from ourmember institutions, regulators and supervisors to join us.Our objective was to promote sound risk managementpractices in our membership. We also held an ERMworkshop with deposit insurers, allowing us again to drawon the experiences of other deposit insurers in this area.We foresee forums such as these to be of considerablevalue in building knowledge.

Finally, we are proud to report that in 2006, we became thefirst deposit insurer to be admitted as an Associate Memberof the Islamic Financial Services Board, an internationalIslamic standards-setting body.

OUR SOCIALLY RESPONSIBLE WORK

Amidst our work on our key initiatives, we also took time toparticipate in socially responsible work.This is because ourcorporate culture encourages employee involvement incommunity work.

This year, we supported the Terry Fox Run (the “Run”) inKuala Lumpur, an event held to raise funds for cancerresearch in Malaysia. This Run is held in over 50 countriesaround the world, to raise funds for cancer research in thecountry in which the Run is held.

Touched by the story of a young boy who ran 42 kilometresa day for 143 days, on one leg, our employees – with PIDM’ssupport – helped organise the Run, to raise funds for cancerresearch in Malaysia.

Among other things, our employees promoted this eventto their friends and colleagues and raised funds throughthe sale of Terry Fox tee-shirts. We also implemented“Casual Fridays” when an employee was allowed to dresscasually by donating RM5 each Friday to the cause.

On 17 September 2006, the Run was held in support ofcancer research in Malaysia. The beneficiary of thischaritable event was the Cancer Research InitiativesFoundation (“CARIF”) – a home-grown organisation dedicatedto research into cancers prevalent in this region.

On the day of the Run, a great crowd of some 9,000 peopleturned up at the Lake Gardens – despite the sweltering heat– to demonstrate their support for the fight against cancer.

Among them were our guests from Bulgaria, Jamaica,Canada,Jordan, Mexico, Kazakhstan, Russia and Turkey. Our guestswere here during the week to attend the IADI ExecutiveCouncil meeting. They also joined us in an engaging pressconference about the Run and spoke on why they supportedthis cause. Some of them sportingly competed in the Runitself. These international participants went home with aTerry Fox tee-shirt each and, we believe, a story to tell aboutPIDM and our responsibility towards society.


Photo courtesy of LENSA Malaysia.

Our guests from IADI, who supported the Run.

Photo courtesy of LENSA Malaysia.

Terry Fox was 18 years old when he was diagnosed with bone cancer. His rightleg was amputated above the knee.Whilst in hospital, Terry was moved by thesuffering of cancer patients, particularly children. So much so that he resolved torun across Canada (a distance of 8,500 kilometres) to raise money for cancerresearch. He called his journey the “Marathon of Hope”. Terry Fox, an amputee,ran a marathon (42 kilometres) a day for 143 consecutive days - a total distanceof 5,373 kilometres. At that stage, Terry was forced to abandon his run asthe cancer spread to his lungs.Terry Fox died at the tender age of 21. Before hedied, he knew that a fund-raising event would be held each year, with the sameobjectives as the Marathon of Hope - to help find a cure for cancer.


briefings, road shows, exhibitions, press conferences ondeposit insurance system in Malaysia as well as trainingprogrammes for our member institutions. Overall, the costsincurred were RM1.5 million (RM0.2 million or 9.4% lowerthan budgeted).

Depreciation expense was RM0.9 million, a positive varianceof 26.8% compared to the budgeted amount of RM1.3million. Operating lease expense was 6.6% lower than budgetof RM0.3 million.

The other expenses of RM3.5 million mainly relate to thecosts of administering the day to day operations.The positivevariance of RM1.7 million or 33.0% was mainly due to lowerprofessional and consultancy costs with a positive variance ofRM0.6 million or 42.6% as well as lower training anddevelopment expenses with a positive variance of 41.8%or RM0.5 million. The positive variance for other expenseswas also due to only RM0.4 million of the RM1.7 millionmiscellaneous and contingency funds provided in the budgetbeing utilised.

CAPITAL EXPENDITURES - HIGHLIGHTS ANDCOMPARISON TO BUDGET

Total capital expenditures for 2006 were RM1.8 million or86% utilisation of the 2006 approved amended budget.Thisis made up of actual capital expenditures incurred in 2006of RM1.7 million and capital expenditures committed as at31 December 2006 of RM0.1 million.The variance of 13.6%or RM0.3 million for capital expenditures was mainly dueto the lower costs for our financial management systemcompared to budget as well as capital items which havebeen planned and approved in 2006 but will only beprocured early 2007.The overall capital budget was mainlyexpended on office equipment (43%), furniture and fittings(35%), motor vehicle (9%), and office refurbishments (13%).The expenditure for office equipment also included costsfor enhancing our information system infrastructure tomeet our operational needs.

BALANCE SHEET HIGHLIGHTS

Cash, Cash Equivalents and Investments

As at 31 December 2006, the combined balance of cash,cash equivalents and investments for both Islamic andConventional Deposit Insurance Funds totalled RM124.8million, consisting of cash and short term investmentsof RM25.1 million and investments of RM99.7 million.The investments consisted of Malaysian GovernmentSecurities and Investment Issues, Bank Negara Bills and

Negotiable Notes with varying maturities of up toJune 2007. The sources and uses of cash are described inthe Statements of Cash Flows in Section IV.

Our investment policy, as approved by the Board ofDirectors, is to only invest in short-term Ringgitdenominated Government securities of varying maturities.Our investment policy prohibits making investments ordepositing funds with any member institutions, except foroperating purposes.

Property and equipment

As at 31 December 2006, property and equipment stood atRM1.7 million,an increase by RM0.7 million from 31 December2005. The increase was due to the capital expendituresincurred for the year on office equipment, furniture and fittings,motor vehicles and office refurbishments. These assets weredepreciated over three years, except for the officerefurbishment costs which would be depreciated over thecurrent term of the office lease expiring at the end ofFebruary 2007.

Other assets

Others assets which totalled RM0.4 million as at 31 December2006, mainly relate to prepayments such as rental deposits onour new office lease as well as other various deposits.

Liabilities

As at 31 December 2006, our liabilities of RM4.5 million,comprised of payables for utilities, telecommunicationsservices rendered in respect of various consultancyengagements and supply of goods. It also includes amountsdue to BNM for employee benefits costs of secondedemployees from BNM as well as provision for unutilisedannual leave. Other payables of RM3.3 million relateto amounts accrued for employee salary adjustments andperformance pay arising from our new compensation andperformance management system.

Contingencies

As the insurer of deposits, we have an inherent exposureto losses resulting from the operations of memberinstitutions. However, this exposure cannot be quantifiedor ascertained at this time. Accordingly, no general orspecific provisions have been recorded in the financialstatements for the financial year ending 2006.

MANAGEMENT’S DISCUSSIONAND ANALYSIS


RM461,000 was raised through the sale of tee-shirts anddonations and all funds raised went solely for the benefitof Malaysians. PIDM too, donated a sum of money towardsthis cause. Between PIDM and our employees, we arepleased to have raised a sum of RM20,744.

What really impressed us was to see, on the day of theRun in KL, the support of a staggering crowd of 9,000 who,like us at PIDM, plainly believe that social responsibility hasits place in the hearts of the people of this country.

GOING FORWARD

In conclusion, we have accomplished a substantial amount ofwork since PIDM was established in September 2005.We areproud of our accomplishments to date but we acknowledgethat we have also still much to do.We have, as we describebelow, put in place an ambitious and challenging CorporatePlan 2007-2009.We believe we have the talents and skills tofulfill our Corporate Plan and to continue our journey to berecognised as a best practice deposit insurer.

2006 FINANCIAL OVERVIEW

For 2006, we completed all of our key initiatives andmilestones within the approved Financial Plan.We set outbelow, the highlights of our 2006 financial performanceand position.

INCOME STATEMENT - HIGHLIGHTS ANDCOMPARISON TO BUDGET

Operating results

For our 2006 financial year, we recorded a net surplusof RM89.9 million which is 5.9% or RM5.0 million higherthan budgeted.Total revenues of RM104.9 million is RM0.02million higher than budgeted, due to higher investmentincome. Operating expenditures of RM15.0 million are25.0% or RM5.0 million lower than the budget ofRM20.0 million.

Revenues

For the 2006 assessment year, the premium rate for depositinsurance was maintained at 0.06%. Premium income forthe year of RM102.1 million was RM0.9 million or 0.9%lower than budgeted. Investment income was slightly higherthan budgeted by RM0.9 million due to the higher averageyield on investments of 3.3% compared to the budget of2.8%. We have maintained a conservative investmentportfolio in accordance with our investment policy.

Operating expenditures

The positive variance for the overall operating expenditureswas mainly due to the lower employee benefits expense andother expenses including professional and consultancy feesas well as training and development expenses.

For the 2006 financial year, our budget on employee salariesand benefits was for 40 employees for the full year. Thesignificant positive variance of RM2.7 million or 23.8% wasdue to the timing of the commencement of employment ofa number of individuals hired throughout the year.The costsof employee benefits have also incorporated the effect of ournew compensation and performance management system.Our employee strength increased from 15 in 2005 to 40 bythe end of 2006.

The public relations and advertising costs relate to expensesincurred in carrying out our stakeholder engagements,public education and awareness programmes including

60

Our staff who participated in the Run.

“ The act of philanthropy is a spiritual act,an expression of caring for one’s

fellow human beings.It is a belief in the future and that the future

can be good. It is investing in that future.It is helping to make the dream come true.”

-- Arthur Frantzreb


CORPORATE GOVERNANCE

SOME AREAS OF FOCUS GOING FORWARD


ERM is a major and ongoing project for us in the years tocome.The ERM framework, once implemented, would helpprovide reasonable assurance that we are managing ourrisks. The Board acknowledges the importance of havingregular assessments of risks facing PIDM, and to have riskmanagement and internal controls embedded withinthe business processes. As such, ERM is one of our keyinitiatives in the Corporate Plan 2007-2009.

The objectives of our ERM framework are as follows:

• To be in a position to formally ensure that all of theorganisation’s significant risks are being identified,assessed, managed, monitored and reported on, using acorporate-wide framework that is consistently andcontinuously applied throughout the organisation; and

• To be in a position to formally demonstrate that weare managing our risks effectively.

Our framework will also take into account new andemerging risks, control failures or changes in ourcircumstances or our corporate initiatives. Accordingly, ourERM framework, once implemented, will be a continuousprocess with regular and ongoing risk assessments.We intend to focus on driving this project going forwardinternally, as well as to promote the development of soundERM systems within member institutions. Please see page 117for our article on ERM.

Differential Premium Systems

Our work on developing our differential premium systemshas already begun. In 2006 our concept and framework forthe differential premium systems were developed, asreported earlier. The principles and objectives of ourdifferential premium systems are to provide incentives formember institutions to adopt sound risk managementpractices. It will, therefore, allow us to differentiatemember institutions according to their risk profiles,introduce more fairness into the premium assessment

system as well as promote stability in the financial system.We are working closely with BNM on this project, whoserepresentatives form part of our Differential PremiumSystems Working Committee. Going forward, we expectto implement the systems by 2008 and will work towardshaving the regulations in place by then. There will beintensive consultation on the systems with memberinstitutions as well as public consultation.

Regulatory requirements on our member institutions

In 2007, we plan to issue consultation papers which willculminate into regulations and guidelines relating to ‘Termsand Conditions of Membership’ and the requirements fordisclosure of information on deposit insurance to depositors.

On the ‘Terms and Conditions of Membership’, our Boardhas approved our proposed concept of incorporating high-level principle-based requirements. We also recognise theimportance of setting out explicit requirements onmember institutions with regard to minimum disclosure ofinformation on deposit insurance and product insurability– to enable depositors to make informed and timelyfinancial decisions.We also plan to establish the criteria fordetermining whether a deposit product (Islamic andconventional) is eligible for insurance. This is to enablePIDM to rule on the insurability of deposit products,both current and future, so that member institutions caninform depositors whether a deposit product is coveredby deposit insurance or not.

International Relations

We will continue our active international involvementthrough our membership in the IADI, and to learn andshare deposit insurance knowledge with the rest of theworld. We will also continue to participate in severalResearch and Guidance Projects, training and seminars ondeposit insurance matters. In October 2007, we will behosting the 6th IADI Annual Conference as part of ourefforts to promote Malaysia in conjunction with Malaysia’s50th anniversary of independence and the Visit MalaysiaYear 2007. The theme for this upcoming conference:“Deposit Insurance and Consumer Protection” reflectsour fundamental commitment to depositors.

62

Source of funding and financial ability

Our source of funding and future ability to meet liabilitiesand commitments are assured.We are the national depositinsurer and by statute, we are obligated to protectdepositors from loss when a member institution is unable tomeet its liabilities to depositors. As a statutory body,our liabilities and commitments are ultimately theresponsibility of the Government.

We are authorised under our enabling legislation to assessannual premiums against member institutions and to setpremium rates with the Minister of Finance approval.Currently, the annual premium rate has been set at 0.06 of1% of insured deposits held by a member. If we requiredfurther funding, premium rates could be increased up to0.5 of 1% of insured deposits with the approval of theMinister of Finance.

Our net surpluses are kept in the Deposit Insurance Funds(“DIF”), which now totals RM122 million. Our policy is tobuild reserves in the DIF over time to provide us withreadily available funds to meet any future obligations.

The MDIC Act empowers us to borrow or raise funds aswe see fit to meet our obligations.We can also request theMinister of Finance to lend us funds from the ConsolidatedRevenue Fund on such terms and conditions as theMinister may determine.

Finally, the MDIC Act prohibits the winding up of thebusiness and affairs of the Corporation.

GOING FORWARD

What to expect: Our Financial Plan 2007

Our rate of premiums for 2007 will continue to remain at0.06% of the insured deposits held by our members as at31 December 2006. Accordingly, premium revenue isbudgeted at RM110 million based on a projected growthrate of 10% of total insured deposits. We are alsobudgeting interest and investment income of RM6 millionfor 2007 resulting in total revenue of RM116 million.

Total operating expenses are budgeted at RM34 millionwhilst capital expenditures are budgeted at RM10 millionfor 2007.

As a result, we expect a net surplus of RM82 million for2007 which will increase the total deposit insurance fundsto RM204 million.

SUMMARY OF OUR CORPORATE PLAN 2007-2009

Our Corporate Plan 2007-2009 was published on 3 January2007 and is available on our website, www.pidm.gov.my. OurCorporate Plan 2007-2009 contains the details of ourstrategies, objectives and key initiatives and financial plan.

OUR STRATEGIC THRUSTS AND CORPORATEOBJECTIVES

We will continue to work in line with our four long-termstrategic thrusts to meet our mandate.We have set out ourcorporate objectives as follows, to have:

i) a well governed and well managed organisation at all times;

ii) educated and informed stakeholders;

iii) effective partnerships to carry out our objectives andinitiatives effectively and efficiently;

iv) prudent financial stewardship making optimal use ofour resources;

v) operational excellence, with policies, systems, processes andprocedures that are based on international best practices;

vi) a competent and knowledgeable workforce; and

vii) a conducive corporate environment that supportsemployee satisfaction and performance.

OUR KEY INITIATIVES

Our initiatives have been developed to support theachievement of our corporate objectives, and are alignedwith our four strategic thrusts.These initiatives are designedto ensure that we have the capacity and capability in ourfunctions and operations for us to fulfill our mandateeffectively. This includes putting in place the necessaryframeworks, policies, processes and procedures to enable usto effectively intervene in troubled member institutions ina manner to minimise losses to the financial system.

Areas of focus and key initiatives in support of our corporateobjectives for 2007-2009 are described in our CorporateScorecard (see Appendix). We will be reporting ourachievements against our Corporate Plan 2007-2009 next year.



Perbadanan Insurans Deposit Malaysia Perbadanan Insurans Deposit Malaysia

SECTION IV:FINANCIAL STATEMENTS

Directors’ Report

Statement by Directors

Statutory Declaration

Auditor General’s Report

Balance Sheet

Income Statement

Statement of Changes in Fund and Reserves

Cash Flow Statement

Conventional Deposit Insurance Fund – Balance Sheet

Conventional Deposit Insurance Fund – Income Statement

Conventional Deposit Insurance Fund – Cash Flow Statement

Islamic Deposit Insurance Fund – Balance Sheet

Islamic Deposit Insurance Fund – Income Statement

Islamic Deposit Insurance Fund – Cash Flow Statement

Notes to the Financial Statements


DIRECTORS’ REPORT

DIRECTORSThe names of the Directors of PIDM in office since its establishment and at the date of this report are:

• Tan Sri Dato’ Abdul Aziz bin Haji Taha (Chairman)• Tan Sri Dato’ Sri Dr Zeti Akhtar Aziz• Tan Sri Dato’ Sri Izzuddin bin Dali• Tan Sri Dato’ Seri Haji Mohd Azmi bin Dato’ Haji Kamaruddin• Datuk Dr Sulaiman bin Mahbob• Datuk Dr Abdul Samad bin Haji Alias• Encik Michael Wong Kuan Lee

Tan Sri Dato’ Sri Dr Zeti Akhtar Aziz and Tan Sri Dato’ Sri Izzuddin bin Dali are directors by virtue of their office, in accordancewith Section 11(2) of the MDIC Act. Members of the Board of Directors of PIDM other than ex-officio members were appointedby the Minister of Finance in accordance with Section 11(2) of the MDIC Act.

DIRECTORS’ BENEFITSDuring the financial period and as at the date of this report,no Director of PIDM has received or become entitled to receive a benefit(other than Director’s remuneration disclosed in the financial statements) by reason of a contract made by PIDM with the Directoror with a firm of which the Director is a member, or with a company in which the Director has a substantial financial interest.

The Directors hereby submit their report and the audited financial statements of Perbadanan Insurans Deposit Malaysia(“PIDM”) for the financial year ended 31 December 2006.

PRINCIPAL ACTIVITIESPIDM is a statutory body established under the Malaysia Deposit Insurance Corporation Act 2005 (“MDIC Act”).

The principal responsibilities of PIDM are to administer a deposit insurance system, provide insurance against the loss of partor all deposits of a member institution, provide incentives for sound risk management in the financial system and to promoteor contribute to the stability of the financial system. PIDM is to carry out its functions and activities in such manner that willminimise the costs to the financial system.

Given that the banking system comprises of Islamic and Conventional banking systems, PIDM insures both Islamic andConventional deposits. To ensure proper governance as well as compliance to Shariah requirements, PIDM maintains andadministers two separate funds for Islamic and Conventional deposits.

2006RM

2005RM

Net surplus for the financial period:

Conventional Deposit Insurance FundIslamic Deposit Insurance Fund

Total net surplus

81,690,9158,241,425

89,932,340

29,527,9763,014,065

32,542,041

Deposit Insurance Funds


Total Deposit Insurance Funds

111,218,89111,255,490

122,474,381

29,527,9763,014,065

32,542,041

RESULTS


RESERVES AND PROVISIONSThere were no transfers to or from reserves and provisions during the financial period.

BAD AND DOUBTFUL DEBTSBefore the income statements and balance sheets of PIDM were completed, the Directors took reasonable steps to ascertain thataction had been taken in relation to the writing off of bad debts and the making of provisions for doubtful debts, and have satisfiedthemselves that there are no known bad debts to be written off or doubtful debts to be provided for.

At the date of this report, the Directors are not aware of any circumstances that would require any amount to be written off asbad debts or debts which are considered doubtful that need to be provided for to any substantial extent.

VALUATION METHODSAt the date of this report, the Directors are not aware of any circumstances which have arisen which render adherence to theexisting methods of valuation of assets or liabilities in PIDM’s accounts misleading or inappropriate.

CHANGE OF CIRCUMSTANCESAt the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or financialstatements of PIDM which would render any amount stated in the financial statements misleading.

ITEMS OF AN UNUSUAL NATUREThe results of the operations of PIDM for the financial period were not, in the opinion of the Directors, substantially affected byany item, transaction or event of a material and unusual nature.

There has not arisen in the interval between the end of the financial period and the date of this report, any item, transaction orevent of a material and unusual nature, likely to affect substantially the results of the operations of PIDM for the current financialperiod in which this report is made.

As at the date of this report, there does not exist any charge on the assets of PIDM which has arisen since the end of the financialperiod which secures the liabilities of any other person.

CONTINGENT LIABILITIESExposure to losses from member institutions

PIDM, as the insurer of deposits, has an inherent exposure to losses resulting from the operations of its member institutions.Thisinherent exposure cannot be quantified or ascertained at this time. Accordingly, no general or specific provisions have beenrecorded in the financial statements for the current financial year being reported.

RESPONSIBILITY FOR THE PREPARATION OF THE FINANCIAL STATEMENTSThe Directors, in providing the opinion on the financial statements, relied on representations by Management on the processes andthe system of internal control as well as the internal and external audit functions designed to ensure that:

i) The financial statements have been prepared in accordance with the provisions of MDIC Act and applicable Financial ReportingStandards (“FRS”) so as to give a true and fair view of the financial position of PIDM as at 31 December 2006 and of the resultsand the cash flows of PIDM for the year ended on that date.The FRS are the Malaysian Accounting Standards Board (“MASB”)Approved Accounting Standards in Malaysia for Entities Other Than Private Entities.

ii) The Islamic Deposit Insurance Fund is maintained and administered in accordance with Shariah requirements, as set out in theMDIC Act.

AUDITORSIn accordance with the MDIC Act, the accounts of PIDM are audited by the Auditor General of Malaysia.

Signed on behalf of the Board in accordance with a resolution of the Directors.

Tan Sri Dato’ Abdul Aziz bin Haji Taha Datuk Dr Abdul Samad bin Haji AliasChairman of the Board of Directors Chairman of the Audit Committee

Kuala Lumpur15 February 2007

Perbadanan Insurans Deposit Malaysia Perbadanan Insurans Deposit Malaysia 67 68

The preparation of the financial statements of Perbadanan Insurans Deposit Malaysia (“PIDM”) and the informationrelated to the financial statements are the responsibility of Management. The financial statements have been prepared inaccordance with the provisions of the Malaysia Deposit Insurance Corporation Act 2005 (“MDIC Act”) and applicableFinancial Reporting Standards, which are the Malaysian Accounting Standards Board Approved Accounting Standards inMalaysia for Entities Other Than Private Entities, so as to give a true and fair view of the state of affairs of PIDM as at 31 December 2006 and of the results and the cash flows of PIDM for the year ended on that date.The Islamic DepositInsurance Fund is maintained and administered in accordance with Shariah requirements, as set out in the MDIC Act.

In discharging its responsibility for the integrity and fairness of the financial statements, Management maintains financialand management control systems and practices as well as an internal audit function designed to provide reasonableassurance that transactions are duly authorised, assets are safeguarded and proper records are maintained in accordancewith the MDIC Act as well as the Statutory Bodies (Accounts and Annual Reports) Act 1980.

These financial statements have been duly audited by the Auditor General of Malaysia and the results of the audit havebeen duly noted by Management. The auditors have free access to the Audit Committee of the Board, which overseesManagement’s responsibilities for maintaining adequate control systems and the quality of financial reporting and whichrecommends the financial statements to the Board of Directors.

The financial statements have been approved by the Board of Directors.

We, Jean Pierre Sabourin and Wan Ahmad Ikram bin Wan Ahmad Lotfi, being the two officers primarily responsible for thefinancial management of PIDM, do solemnly and sincerely declare that the financial statements are, to the best of ourknowledge and belief, correct, and we make this solemn declaration conscientiously believing the same to be true and byvirtue of the provisions of the Statutory Declarations Act 1960.

Subscribed and solemnly declared by the abovenamed at Kuala Lumpur on 15 February 2007.

Jean Pierre Sabourin Wan Ahmad Ikram bin Wan Ahmad LotfiChief Executive Officer General Manager, Finance and Administration

and Chief Financial Officer

Before me,

Commissioner of Oaths

We,Tan Sri Dato’ Abdul Aziz bin Haji Taha and Datuk Dr Abdul Samad bin Haji Alias, being two of the Directors of PerbadananInsurans Deposit Malaysia, do hereby state that, in the opinion of the Directors, the financial statements are drawn up inaccordance with the provisions of the Malaysia Deposit Insurance Corporation Act 2005 and applicable Financial ReportingStandards, which are the Malaysian Accounting Standards Board Approved Accounting Standards in Malaysia for Entities OtherThan Private Entities, so as to give a true and fair view of the state of affairs of PIDM as at 31 December 2006 and of theresults and the cash flows of PIDM for the period ended on that date.The Directors are also of the opinion that the IslamicDeposit Insurance Fund is maintained and administered in accordance with Shariah requirements, as set out in the MalaysiaDeposit Insurance Corporation Act 2005.

Signed on behalf of the Board in accordance with a resolution of the Directors.

Tan Sri Dato’ Abdul Aziz bin Haji Taha Datuk Dr Abdul Samad bin Haji AliasChairman of the Board of Directors Chairman of the Audit Committee

Kuala Lumpur15 February 2007

STATUTORY DECLARATION BY MANAGEMENT IN RELATION TO THE RESPONSIBILITY

FOR FINANCIAL REPORTINGSTATEMENT BY DIRECTORS


BALANCE SHEETAS AT 31 DECEMBER

ASSETS

Cash and cash equivalentsInvestments

Held-to-maturity investmentsOther assetsProperty and equipment

Total Assets

Note

3

456

25,116,262

99,700,227431,721

1,772,009

127,020,219

1,706,628

30,295,189149,394

1,025,273

33,176,484

LIABILITIES

Payables

Total Liabilities

7 4,545,838

4,545,838

634,443

634,443

DEPOSIT INSURANCE FUNDS AND RESERVES



Total Liabilities and Deposit Insurance Funds

8a8b

111,218,89111,255,490

122,474,381

127,020,219

29,527,9763,014,065

32,542,041

33,176,484

The accompanying notes form an integral part of the financial statements

2006 RM

2005 RM


INCOME STATEMENTFOR THE YEAR ENDED 31 DECEMBER


Premium revenueInvestment income from cash and investment securities

Note

910

102,122,2052,815,560

104,937,765

35,671,770204,692

35,876,462

Employee benefitsPublic relations and advertisingDepreciationOperating leaseOther expenses

11

6

12

8,768,0011,472,541

974,567283,947

3,506,369

15,005,425

1,103,582405,18789,40146,050

1,690,201

3,334,421

Net surplus 89,932,340 32,542,041

2006RM

2005 RM


At 1 September 2005

Net surplus for the period

At 31 December 2005

-

29,527,976

29,527,976

Note

8

8

-

32,542,041

32,542,041

-

3,014,065

3,014,065

At 1 January 2006

Net surplus for the year

At 31 December 2006

29,527,976

81,690,915

111,218,891

8

8

32,542,041

89,932,340

122,474,381

3,014,065

8,241,425

11,255,490

STATEMENT OF CHANGES IN FUNDS AND RESERVES

FOR THE YEAR ENDED 31 DECEMBER 2006

Islamic Deposit

Insurance FundRM

Conventional Deposit

InsuranceFundRM

TotalRM


The accompanying notes form an integral part of the financial statements The accompanying notes form an integral part of the financial statements

CONVENTIONAL DEPOSITINSURANCE FUND


ASSETS



Total Assets

Note

3

456a

23,021,161

90,323,435391,311

1,607,921

115,343,828

1,628,978

27,405,262135,887930,333

30,100,460

LIABILITIES

Payables

Total Liabilities

7 4,124,937

4,124,937

572,484

572,484


Conventional Deposit Insurance Fund


Total Liabilities and Deposit Insurance Fund

8a 111,218,891

111,218,891

115,343,828

29,527,976

29,527,976

30,100,460

2006 RM

2005 RM

CASH FLOWS FROM OPERATING ACTIVITIES

Premium receipts from member institutionsPayments in the course of operations to suppliers and employeesReceipts of investment income

Net cash flow from operating activities

Note

9 102,122,205

(8,093,746)1,572,100

95,600,559

35,671,770

(2,759,970)82,997

32,994,797

CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sale of investment securitiesPurchase of investment securitiesPurchase of property and equipment

Net cash flow used in investing activities

143,220,496(213,693,039)

(1,718,382)

(72,190,925)

24,917,002(55,090,497)(1,114,674)

(31,288,169)

CASH FLOWS FROM FINANCING ACTIVITIESAdvances received from Bank Negara MalaysiaRepayment of advances from Bank Negara Malaysia

Net cash flow used in financing activities

--

-

5,500,000(5,500,000)

-

23,409,6341,706,628

25,116,262

1,706,628-

1,706,628

CASH FLOW STATEMENTFOR THE YEAR ENDED 31 DECEMBER

3

Net increase/(decrease) in cash and cash equivalentsCash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

2006 RM

2005 RM






Note

910

92,719,0072,576,330

95,295,337

32,368,754184,851

32,553,605


11

6a

12

7,956,0841,333,401

884,322257,653

3,172,962

13,604,422

1,001,391378,44481,12241,786

1,522,886

3,025,629

Net surplus 81,690,915 29,527,976

2006 RM

2005RM







Note

9 92,719,007

(7,519,297)1,477,336

86,677,046

32,368,754

(2,507,911)78,108

29,938,951



131,422,664(195,148,267)

(1,559,260)

(65,284,863)

22,921,893(50,220,411)(1,011,455)

(28,309,973)

CASH FLOWS FROM FINANCING ACTIVITIESAdvances received from Bank Negara MalaysiaRepayment of advances from Bank Negara Malaysia

Net cash flow used in financing activities

--

-

5,500,000(5,500,000)

-

21,392,1831,628,978

23,021,161

1,628,978-

1,628,9783



2006 RM

2005RM



ISLAMIC DEPOSIT INSURANCE FUND


ASSETS



Total Assets

Note

3

456b

2,095,101

9,376,79240,410

164,088

11,676,391

77,650

2,889,92713,50794,940

3,076,024

LIABILITIES

Payables

Total Liabilities

7 420,901

420,901

61,959

61,959


Islamic Deposit Insurance Fund


Total Liabilities and Deposit Insurance Fund

8b 11,255,490

11,255,490

11,676,391

3,014,065

3,014,065

3,076,024

2006 RM

2005 RM





Note

910

9,403,198239,230

9,642,428

3,303,01619,841

3,322,857


11

6b

12

811,917139,14090,24526,294

333,407

1,401,003

102,19126,7438,2794,264

167,315

308,792

Net surplus 8,241,425 3,014,065

2006 RM

2005RM








Note

9 9,403,198

(574,449)94,764

8,923,513

3,303,016

(252,059)4,889

3,055,846

2006 RM

2005RM



1,995,109(4,870,086)

(103,219)

(2,978,196)

2,017,45177,650

2,095,101

77,650-

77,6503



11,797,832(18,544,772)

(159,122)

(6,906,062)

1. PRINCIPAL ACTIVITIES

PIDM is a statutory body established under the Malaysia Deposit Insurance Corporation Act 2005 (“MDIC Act”).

The principal responsibilities of PIDM are to administer a deposit insurance system, provide insurance against the loss of partor all deposits of a member institution, provide incentives for sound risk management in the financial system and to promoteor contribute to the stability of the financial system. PIDM is to carry out its functions and activities in such manner that willminimise the costs to the financial system.

MDIC Act provides for separate coverage for Islamic and Conventional deposits. To ensure proper governance as well ascompliance to Shariah requirements, PIDM maintains and administers an Islamic Deposit Insurance Fund and a ConventionalDeposit Insurance Fund.

The office address of PIDM is at Level 22, Dataran Kewangan Darul Takaful, No. 4 Jalan Sultan Sulaiman, 50000 Kuala Lumpur.

The financial statements were authorised for issue by the Board of Directors in accordance with a resolution of the Directorson 15 February 2007.

2. SIGNIFICANT ACCOUNTING POLICIES

2.1 BASIS OF ACCOUNTING

The financial statements have been prepared under the historical cost convention and in compliance with the MDIC Act.As a matter of policy, the financial statements have been prepared in compliance with applicable Financial Reporting Standards(“FRS”), which are the Malaysian Accounting Standards Board (“MASB”) Approved Accounting Standards in Malaysia for EntitiesOther Than Private Entities.

The financial statements incorporate those activities relating to the administration of both Islamic and Conventional DepositInsurance Funds of PIDM. The Islamic Deposit Insurance Fund is maintained and administered in accordance with Shariahrequirements, as set out in the MDIC Act.

2.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) Financial instrumentsFinancial instruments are recognised in the balance sheet when PIDM has become a party to the contractualprovisions of the instruments.

i) Cash and Cash EquivalentsCash and cash equivalents comprise cash on hand, deposits held at call with banks and short term, highly liquidinvestments that are readily convertible to known amounts of cash and which are subject to insignificant risk ofchanges in value.The cash flow statement is prepared using the direct method.

NOTES TO THE FINANCIAL STATEMENTS

31 DECEMBER 2006


ii) InvestmentsInvestments comprise primarily of marketable Malaysian Government Securities and other investmentsecurities guaranteed by Bank Negara Malaysia, and are intended to be held to maturity.These securities withfixed or determinable payments and fixed maturity are stated at cost adjusted for amortisation of premiumsor accretion of discounts, calculated on an effective yield basis, from the dates of purchase to the maturitydate.The amortisation of premiums and accretion of discounts are recognised in the income statements.

iii) Receivables and other assetsReceivables and other assets are stated at anticipated net realisable values. Bad debts are written off whenidentified. An estimate, if any, is made for doubtful debts based on a review of all outstanding amounts as atbalance sheet date.

iv) PayablesPayables are stated at cost which is the fair value of the consideration to be paid in the future for goods andservices rendered.

b) Impairment of non-financial assetsAt each balance sheet date, PIDM reviews the carrying amounts of its assets, other than financial assets, to determinewhether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount isestimated to determine the amount of impairment loss.

For goodwill, intangible assets that have an indefinite useful life and intangible assets that are not yet available for use,the recoverable amount is estimated at each balance sheet date or more frequently when indicators of impairmentare identified.

For the purpose of impairment testing of these assets, recoverable amount is determined on an individual asset basis.An asset’s recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. In assessingvalue in use, the estimated future cash flows are discounted to their present value using a discount rate that reflectscurrent market assessments of the time value of money and the risks specific to the asset. Where the carryingamount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to itsrecoverable amount.

An impairment loss is recognised in income statement in the period in which it arises, unless the asset is carried ata revalued amount, in which case the impairment loss is accounted for as a revaluation decreases to the extent thatthe impairment loss does not exceed the amount held in the asset revaluation reserve for the same asset.

An impairment loss for assets other than goodwill is reversed if, and only if, there has been a change in the estimatesused to determine the asset’s recoverable amount since the last impairment loss was recognised.The carrying amountof an asset other than goodwill is increased to its revised recoverable amount, provided that this amount does notexceed the carrying amount that would have been determined (net of amortisation or depreciation) had noimpairment loss been recognised for the asset in prior years. A reversal of impairment loss for an asset other thangoodwill is recognised in income statement, unless the asset is carried at revalued amount, in which case, such reversalis treated as a revaluation increase. Impairment loss on goodwill is not reversed in subsequent period.


31 DECEMBER 2006


c) Property and Equipment and DepreciationAll items of property and equipment are initially recorded at cost. Subsequent costs are included in the asset’scarrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economicbenefits associated with the item will flow to PIDM and the cost of the item can be measured reliably.The carryingamount of parts or components of an asset that are replaced is de-recognised. All other repairs and maintenance arecharged to the income statement during the financial period in which they are incurred.

Subsequent to recognition, property and equipment are stated at cost less accumulated depreciation and anyaccumulated impairment losses.

Depreciation is provided for on a straight-line basis to write-off the cost of each asset to its residual value over theestimated useful life, at the following annual rates:

Motor vehicles 20%Office equipment 33.3%Furniture and fittings 33.3%

For office refurbishments, the annual depreciation rate of 66.7% is calculated over the term of the office lease for aperiod of 18 months beginning from 1 September 2005.

The residual values, useful life and depreciation method are reviewed at each financial year-end to ensure that theamount, method and period of depreciation are consistent with previous estimates and the expected pattern ofconsumption of the future economic benefits embodied in the items of property and equipment.

An item of property and equipment is derecognised upon disposal or when no future economic benefits are expectedfrom its use or disposal. The difference between the net disposal proceeds, if any, and the net carrying amount isrecognised in income statement and the unutilised portion of the revaluation surplus on that item is taken directlyto retained earnings.

d) Recognition of income and expenditureAll income and operating expenditures are recognised on an accrual basis. In accordance with the MDIC Act,the expenditures of PIDM which could not be directly attributed to the Islamic Deposit Insurance Fund orConventional Deposit Insurance Fund are apportioned based on the proportion of the Islamic and Conventionalpremiums received against total annual premiums immediately prior to the year in which such expenditures areincurred. For the current financial year, the apportionment basis was determined based on the proportion ofactual premiums received during the financial period ended 31 December 2005. The apportionment basis usedfor the Islamic Deposit Insurance Fund and the Conventional Deposit Insurance Fund during the financial yearwas 9.26% (2005: 9.26%) and 90.74% (2005: 90.74%) respectively.

Premium income is recognised in a financial period in respect of risks assumed during that particular financialperiod. Member institutions pay annual deposit insurance premiums for the risk coverage period which coincideswith PIDM’s financial period.

Investment income is recognised on a time proportion basis that reflects the effective yield on the asset.


31 DECEMBER 2006


e) Employee benefits

i) Short-term benefitsWages, salaries, bonuses, social security contributions and other benefits such as medical coverage benefits andallowances are recognised as an expense in the year in which the associated services are rendered by employeesof PIDM. Short term accumulating compensated absences such as paid annual leave are recognised when servicesare rendered by employees that increase their entitlement to future compensation. Short term non-accumulatingcompensated absences such as sick leave are recognised when the absences occur.

ii) Defined contribution planA defined contribution plan is a post-employment benefit plan under which PIDM pays fixed contributionsinto a separate entity or fund and will have no legal or constructive obligation to pay further contributionsif the fund does not hold sufficient assets to pay all employee benefits relating to employee services in thecurrent or preceding financial years. Such contributions are recognised as an expense in the incomestatements as incurred. As required by law, PIDM makes contributions to the statutory national pensionscheme, the Employee Provident Fund.

f) Foreign currencies

i) Functional and presentation currencyThe financial statements of PIDM are presented in Ringgit Malaysia (“RM”), which is the currency of the primaryeconomic environment in which PIDM operates (“functional currency”).

ii) Foreign currency transactionsIn preparing the financial statements of PIDM, transactions in foreign currencies other than PIDM’s functionalcurrency are recorded in the functional currencies using the exchange rates prevailing at the dates of thetransactions. At each balance sheet date, monetary items denominated in foreign currencies are translated at therates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated inforeign currencies are translated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not translated.

Exchange differences arising from the settlement of monetary items, and on the translation of monetary items,are included in income statement for the period. Exchange differences arising from the translation of non-monetary items carried at fair value are included in income statement for the period except for the differencesarising from the translation of non-monetary items in respect of which gains and losses are recognised directlyin equity. Exchange differences arising from such non-monetary items are also recognised directly in equity.

2.3 CHANGES IN ACCOUNTING POLICIES AND EFFECTS ARISING FROM ADOPTION OF NEWAND REVISED FINANCIAL REPORTING STANDARDS (“FRS”)

On 1 January 2006, PIDM adopted applicable FRS mandatory for financial periods beginning on or after 1 January 2006 as follows:

FRS 101 Presentation of Financial StatementsFRS 108 Accounting Policies, Changes in Estimates and ErrorsFRS 110 Events after the Balance Sheet Date


31 DECEMBER 2006


31 DECEMBER 2006

FRS 116 Property, Plant and EquipmentFRS 121 The Effects of Changes in Foreign Exchange RatesFRS 132 Financial Instruments: Disclosure and PresentationFRS 136 Impairment of Assets

In addition, PIDM has early adopted the following new and revised FRS for the financial period beginning 1 January 2006:

FRS 117 LeasesFRS 124 Related Party DisclosuresFRS 139 Financial Instruments: Recognition and Measurement

The following new or revised FRS are not relevant to PIDM’s operations:

FRS 2 Share-based PaymentFRS 3 Business CombinationsFRS 5 Non-current Assets Held for Sale and Discontinued OperationsFRS 6 Exploration for and Evaluation of Mineral ResourcesFRS 102 InventoriesFRS 127 Consolidated and Separate Financial StatementsFRS 128 Investments in AssociatesFRS 131 Interests in Joint VenturesFRS 133 Earnings Per ShareFRS 138 Intangible AssetsFRS 140 Investment Properties

The adoption of the revised FRS except for FRS 101 Presentation of Financial Statements does not result in significant changesin accounting policies of PIDM. The principal changes in accounting policies and their effects resulting from the adoption ofFRS 101 are discussed below.

FRS 101: PRESENTATION OF FINANCIAL STATEMENTS

a) Presentation of balance sheetsFRS 101 requires an entity to present current and non-current assets and current and non-current liabilities, as separateclassifications on the face of its balance sheet, except when a presentation based on liquidity provides information that ismore reliable and relevant. PIDM has chosen to present its balance sheets showing assets and liabilities in their broadorder of liquidity because such information is more reliable and relevant, given the nature of its operations and principalactivities as an administrator of a deposit insurance system. Adoption of FRS 101 has no impact on the presentation ofPIDM’s balance sheets compared to the preceding financial period.

b) Presentation of income statementsFRS 101 provides that the expenditures should be sub-classified based on either the nature or the function of theexpenditures, whichever provides a more reliable and relevant information. PIDM adopts to present its analysis ofexpenditures using the ‘nature of expenditure’ method as this provides more relevant information in relation to itsoperations.These changes in presentation have been applied retrospectively, and as such, the comparative figures for the2005 financial period have been restated according to the new presentation format.


Deposits with Bank Negara MalaysiaCash on hand and at bank

Short-term investments:Malaysian Government Securities and Investment IssuesBank Negara Bills and Negotiable Notes

Add: Accretion of discounts net of amortisation of premium

Market values of short-term investments held as at 31 December 2006 are as follows:Malaysian Government Securities and Investment IssuesBank Negara Bills and Negotiable Notes

477,1502,639,516

996,08918,895,311

19,891,400

13,095

19,904,495

23,021,161

998,20018,900,400

19,898,600

2006

1,273,965821,136

--

-

-

-

2,095,101

--

-

1,751,1153,460,652

996,08918,895,311

19,891,400

13,095

19,904,495

25,116,262

998,20018,900,400

19,898,600

Deposits with Bank Negara MalaysiaCash on hand and at bank

Short-term investments:Malaysian Government Securities and Investment IssuesBank Negara Bills and Negotiable Notes

Add: Accretion of discounts net of amortisation of premium

77,2881,551,690

--

-

-

-

1,628,978

2005

-77,650

--

-

-

-

77,650

77,2881,629,340

--

-

-

-

1,706,628

Short-term investments that have a term to maturity of less than 90 days are categorised as cash equivalents.

3. CASH AND CASH EQUIVALENTS

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM


31 DECEMBER 2006

4. INVESTMENTS

The entire balance of investments is denominated in Ringgit Malaysia.

The market values of investments in the Islamic and Conventional Deposit Insurance Funds as disclosed above are indicativeof their fair values as at the end of the financial period and are determined by reference to indicative market prices as providedby Bank Negara Malaysia.

Malaysian Government Securities and Investment IssuesBank Negara Bills and Negotiable Notes

Accretion of discounts net of amortisation of premium

Market values of investments are as follows:Malaysian Government Securities and Investment IssuesBank Negara Bills and Negotiable Notes

37,593,36452,110,294

89,703,658

619,777

90,323,435

38,007,70052,307,500

90,315,200

2006

6,273,6932,953,950

9,227,643

149,149

9,376,792

6,410,300 2,968,800

9,379,100

43,867,05755,064,244

98,931,301

768,926

99,700,227

44,418,00055,276,300

99,694,300


Accretion of discounts net of amortisation of premium

Market values of investments are as follows:Malaysian Government Securities and Investment IssuesBank Negara Bills and Negotiable Notes

-27,298,518

27,298,518

106,744

27,405,262

-27,398,050

27,398,050

2005

-2,874,977

2,874,977

14,950

2,889,927

-2,889,145

2,889,145

-30,173,495

30,173,495

121,694

30,295,189

-30,287,195

30,287,195

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM


31 DECEMBER 2006


5. OTHER ASSETS

Deposits and prepaymentsOther receivables

377,18614,125

391,311

2006

38,4911,919

40,410

415,67716,044

431,721

Deposits and prepaymentsOther receivables

132,3503,537

135,887

2005

13,507-

13,507

145,8573,537

149,394

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM


31 DECEMBER 2006

6. PROPERTY AND EQUIPMENT

Cost

Balance as at 1 January 2006AdditionsReclassificationWrite-offs

Balance as at 31 December 2006

500,002260,320 53,759

-

814,081

2006

1,114,6741,731,743

-(13,360)

2,833,057

Total RM

-172,009

--

172,009

153,348655,682(53,759)

-

755,271

Furnitureand fittings

RM

Motorvehicles

RM

Officerefurbishments

RM

461,324643,732

-(13,360)

1,091,696

Officeequipment

RM

Accumulateddepreciation

Balance as at 1 January 2006Charge for the yearReclassificationWrite-offs


55,556497,836

5,973-

559,365

89,401974,567

-(2,920)

1,061,048

-25,801

--

25,801

8,511215,411

(5,973)-

217,949

25,334235,519

-(2,920)

257,933

Net carryingamount

At 31 December 2006 254,716 1,772,009146,208537,322833,763

Cost

Balance as at 1 September 2005AdditionsReclassificationWrite-offs


-500,002

--

500,002

2005

-1,114,674

--

1,114,674

Total RM

----

-

-153,348

--

153,348


RM

Motorvehicles

RM


RM

-461,324

--

461,324

Officeequipment

RM


Balance as at 1 September 2005Charge for the yearReclassificationWrite-offs


-55,556

--

55,556

-89,401

--

89,401

----

-

-8,511

--

8,511

-25,334

--

25,334

Net carryingamount

At 31 December 2005 444,446 1,025,273-144,837435,990


Cost



453,702236,214 48,781

-

738,697

2006

1,011,4551,571,383

-(12,123)

2,570,715

Total RM

-156,081

--

156,081

139,148594,966(48,781)

-

685,333


RM

Motorvehicles

RM


RM

418,605584,122

-(12,123)

990,604

Officeequipment

RM




50,411451,736

5,420-

507,567

81,122884,322

-(2,650)

962,794

-23,412

--

23,412

7,723195,464

(5,420)-

197,767

22,988213,710

-(2,650)

234,048

Net carryingamount

At 31 December 2006 231,130 1,607,921132,669487,566756,556

Cost



-453,702

--

453,702

2005

-1,011,455

--

1,011,455

Total RM

----

-

-139,148

--

139,148


RM

Motorvehicles

RM


RM

-418,605

--

418,605

Officeequipment

RM




-50,411

--

50,411

-81,122

--

81,122

----

-

-7,723

--

7,723

-22,988

--

22,988

Net carryingamount

At 31 December 2005 403,291 930,333-131,425395,617

6. PROPERTY AND EQUIPMENT (Continued)A. CONVENTIONAL DEPOSIT INSURANCE FUND

Cost



46,30024,106 4,978

-

75,384

2006

103,219160,360

-(1,237)

262,342

Total RM

-15,928

--

15,928

14,20060,716(4,978)

-

69,938


RM

Motorvehicles

RM


RM

42,71959,610

-(1,237)

101,092

Officeequipment

RM




5,14546,100

553-

51,798

8,27990,245

-(270)

98,254

-2,389

--

2,389

78819,947

(553)-

20,182

2,34621,809

-(270)

23,885

Net carryingamount

At 31 December 2006 23,586 164,08813,53949,75677,207

Cost



-46,300

--

46,300

2005

-103,219

--

103,219

Total RM

----

-

-14,200

--

14,200


RM

Motorvehicles

RM


RM

-42,719

--

42,719

Officeequipment

RM




-5,145

--

5,145

-8,279

--

8,279

----

-

-788

--

788

-2,346

--

2,346

Net carryingamount

At 31 December 2005 41,155 94,940-13,41240,373

6. PROPERTY AND EQUIPMENT (Continued)B. ISLAMIC DEPOSIT INSURANCE FUND


7. PAYABLES

8. DEPOSIT INSURANCE FUNDS

a. Conventional Deposit Insurance Fund

b. Islamic Deposit Insurance Fund

Amount due to Bank Negara MalaysiaSundry creditorsOther payablesProvision for unutilised leave

250,853845,881

2,996,294 31,909

4,124,937

2006

25,600 86,322

305,723 3,256

420,901

276,453932,203

3,302,01735,165

4,545,838

9. PREMIUM INCOME

First premiumsAnnual premiums

2006

1,197,4378,205,761

9,403,198

1,165,111100,957,094

102,122,205

First premiumsAnnual premiums

32,368,754 -

32,368,754

2005

3,303,016 -

3,303,016

35,671,770 -

35,671,770

Opening balanceNet surplus

Closing balance

29,527,97681,690,915

111,218,891

-29,527,976

29,527,976

Opening balanceNet surplus

Closing balance

3,014,0658,241,425

11,255,490

-3,014,065

3,014,065

Amount due to Bank Negara MalaysiaSundry creditorsOther payablesProvision for unutilised leave

466,224106,260

--

572,484

2005

47,57810,8443,537

-

61,959

513,802 117,104

3,537 -

634,443

Under the Malaysia Deposit Insurance Corporation (First Premium) Order 2005, in relation to the First Premium (for new memberinstitutions), member institutions were given the option of electing either one of the following premium rate basis:

a) 0.02% per annum of the total deposits of the member institution; or

b) 0.06% per annum of the total insured deposits of the member institution.

However, the First Premium is subject to a minimum premium of RM250,000.

Under the Malaysia Deposit Insurance Corporation (Annual Premium) Order 2006, the rate of Annual Premium for the 2006assessment year is 0.06% of the total insured deposits of the respective member institution.

However, the Annual Premium is subject to a minimum premium of RM250,000.

The annual premiums for 2006 were due and payable by 31 May 2006.

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM


31 DECEMBER 2006


31 DECEMBER 2006

2006RM

2005RM

2005RM

2006RM

92,751,333

92,719,007

(32,326)


10. INVESTMENT INCOME


461,5402,114,790

2,576,330

2006

133,989105,241

239,230

595,5292,220,031

2,815,560

12. OTHER EXPENSES

13.TAXATION

PIDM is currently exempted from income tax at the statutory level for a period of 10 years commencing in the Year ofAssessment 2005.

Audit feesDirectors’ fees and remuneration*Printing and stationery expenseProfessional and consultancy feesSubscriptions and membershipsTraining and development expenseWebsite development and maintenance expenseMiscellaneous expenses

* Directors are paid on a fee and allowance structure as approved by the Minister of Finance.

22,685132,480891,435697,440175,832596,129256,470400,491

3,172,962

2006

2,31513,52090,97172,20718,41274,00723,07338,902

333,407

25,000146,000 982,406769,647194,244670,136279,543439,393

3,506,369

Audit feesDirectors’ fees and remunerationPrinting and stationery expenseProfessional and consultancy feesSubscriptions and membershipsTraining and development expenseWebsite development and maintenance expenseMiscellaneous expenses

18,148105,25827,922

709,08251,540

157,401247,493206,042

1,522,886

2005

1,85210,7422,849

72,3625,260

16,06325,25732,930

167,315

20,000116,00030,771

781,44456,800

173,464272,750238,972

1,690,201


19,565165,286

184,851

2005

4,89114,950

19,841

24,456180,236

204,692

The weighted average yield rates for the investment securities that were effective during the financial year were 3.27% (2005: 2.77%) and 3.36% (2005: 2.81%) for the Islamic and Conventional portfolio respectively.

11. EMPLOYEE BENEFITS EXPENSE

Wages and salariesContributions to defined contribution planProvision for unutilised leaveOther benefits

2006

7,592,831479,32035,165

660,685

8,768,001

Wages and salariesContributions to defined contribution planProvision for unutilised leaveOther benefits

661,80673,125

-266,460

1,001,391

2005

67,5377,462

-27,192

102,191

729,34380,587

-293,652

1,103,582

The number of employees at the end of the financial year was forty (40) (2005:15).

676,35770,7993,256

61,505

811,917

6,916,474408,52131,909

599,181

7,956,084

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM

TotalRM

Conventional RM

Islamic RM


31 DECEMBER 2006


31 DECEMBER 2006


14. OPERATING LEASE ARRANGEMENT

PIDM has entered into a non-cancellable operating lease agreement for use of office space.The lease arrangement is forthe current office space at Level 22, Dataran Kewangan Darul Takaful which will expire by end of February 2007.The agreement also includes a renewal option for a period to be mutually agreed between PIDM and the lessor.There areno purchase option or escalation clauses included in the contract. There are also no restrictions placed upon PIDM byentering into this lease arrangement.

PIDM has also entered into leases for various office equipment under non-cancellable operating lease agreements.These leases are for 5 years with automatic renewal for another 5 years period if PIDM does not serve termination noticethree months before expiration of the primary term. There are no purchase option or escalation clauses included inthe agreements.

Subsequent to balance sheet date, PIDM had entered into a non-cancellable lease agreement for the new office in KLSentral area. Details of the lease arrangement are described in Note 19.

Future aggregate minimum lease payments under the non-cancellable operating lease contracted as at the balance sheetdate but not recognised as liabilities are as follows:

16. CONTINGENCIES

Exposure to losses from member institutions

PIDM, as the insurer of deposits, has an inherent exposure to losses resulting from the operations of its member institutions.This inherent exposure cannot be quantified or ascertained at this time. Accordingly, no general or specific provisions havebeen recorded in the financial statements for the current financial period.

15. CAPITAL COMMITMENTS

Future minimum rentals payments:Not later than 1 yearLater than 1 year and not later than 5 years

71,88081,028

152,908

256,89445,720

302,614

Capital expenditures

Approved and contracted for:Property and equipment 70,176

70,176

508,144

508,144

2005 RM

2006 RM

2005 RM

2006 RM


31 DECEMBER 2006


31 DECEMBER 2006

17. RELATED PARTY DISCLOSURES

Transactions with related partiesPIDM has entered into a contract with Ernst & Young, a firm of which one of the Directors of PIDM is the non-executivechairman of the firm, for the provision of business consultancy services to PIDM.The fee charged is RM150,000 which iscomparable to market prices. As at 31 December 2006, outstanding fee due to the firm is RM50,000. The Director wasnot involved in the selection process, nor did he participate in or deliberate on the decision by Management to contractthe chosen firm.The Director also did not obtain or gain any benefits from the contract.

18. FINANCIAL INSTRUMENTS

PIDM’s financial risk management policy seeks to ensure that adequate financial resources are available for PIDM’sactivities whilst managing PIDM’s currency, interest rate and rate of return, liquidity, market and credit risks. PIDMoperates within guidelines that are approved by the Board of Directors and PIDM’s policy is to only invest in short-termRinggit denominated Government securities of varying maturities. No investments are made with member institutionssince PIDM is the insurer of deposits.

a) Foreign currency riskPIDM is currently not exposed to any currency risk as all transactions were transacted in Ringgitdenominated currency.

b) Interest rate risk and rate of return risk PIDM’s interest rate and rate of return risks will arise principally from differences in maturities of its financialassets and liabilities.

The financial assets are made up primarily of investment assets held in Malaysian Government Securities andInvestment Issues; and Bank Negara Malaysia Bills and Negotiable Notes. The interest rate risk in this respectarises from fluctuations in market interest rate which may affect the market values and reinvestment decisions ofthese financial assets. The rate of return risk is the potential impact of market factors affecting the return onassets which consequently, may affect the market values and reinvestment decisions of these financial assets. Tomitigate these risks, PIDM currently only invests in short-term securities which minimises the impact of anyfluctuations in market interest rate or rate of return on the market value of these securities.

PIDM currently does not carry any liabilities which are exposed to interest rate risk.


-89,327,027

-12,650,659

-9,376,792

-694,444

23,021,16190,323,435

1,628,97827,405,262

2,095,1019,376,792

77,6502,889,927

9,925,918996,408

-10,755,813

--

-1,195,712

13,095,243-

1,628,9783,998,790

2,095,101-

77,650999,771

WAYR%

3.363.47

-2.86

-3.56

-2.79

Note

34

34

34

34

Conventional DepositInsurance Fund

31 December 2006Fixed rateCash and Cash EquivalentInvestments


Islamic DepositInsurance Fund



Within 1 monthRM

1>3 monthsRM

3>12 monthsRM

Total RM


31 DECEMBER 2006

c) Liquidity riskA significant amount of funds available for investment were invested in short-term securities. PIDM continuouslyendeavours to manage the maturity profiles of these securities in order to ensure that sufficient funds are availableat all times, to meet the day to day working capital requirements.

d) Market riskPIDM’s investment in short-term securities are intended to be held to maturity and not actively traded. As such,PIDM’s exposure to market risk in the context of these investments is minimal.

e) Credit riskPIDM only invested in Malaysian Government Securities and Investment Issues; and Bank Negara Malaysia Bills andNegotiable Notes, which are generally considered low risk assets. PIDM does not expect the counterparties todefault and as such, considers the credit risk on its investment assets as being very minimal.

f) Fair valuesGenerally, the carrying values of financial assets and liabilities of the Islamic Deposit Insurance Fund and theConventional Deposit Insurance Fund approximate their fair values, except for the investments in MalaysianGovernment Securities and Investment Issues; and Bank Negara Malaysia Bills and Negotiable Notes whereby the fairvalue may be represented by the market values of these securities as noted in Notes 3 and 4.

The following tables set out the carrying amounts, the Weighted Average Yield Rates (“WAYR”) as at the balance sheet dateand the remaining maturities of PIDM’s financial instruments that are exposed to interest rate risk and rate of return risk.


19. SUBSEQUENT EVENT

On 5 February 2007, PIDM entered into a non-cancellable lease agreement for the new office in KL Sentral area. Thelease payment is to be effective a month after PIDM takes possession of the office space, which is expected to be inApril 2007. The lease is for 5 years at a fixed rental rate with the option to renew for another 5 years. There are nopurchase option or escalation clauses included in the agreement. There are also no restrictions placed upon PIDM byentering into this lease agreement.

The expected future aggregate minimum lease payments under this non-cancellable operating lease contractedsubsequent to balance sheet date are as follows:

20. CURRENCY

All amounts are stated in Ringgit Malaysia.

21. COMPARATIVE INFORMATION

The comparative disclosure for 2005 is for the four months period ended 31 December 2005.


31 DECEMBER 2006

Future minimum rentals payments:Not later than 1 yearLater than 1 year and not later than 5 yearsLater than 5 years

617,0403,702,240

308,520

4,627,800

2006 RM

SECTION V:ARTICLES

Our Governance Framework

Compliance with Best PracticesAppendix: Self-Assessment of Compliance with FSF Guidance


101 102

I. How We Report and Answer for Our Performance

As a matter of law, we are independently audited by theAuditor General. Our Annual Report including our auditedfinancial statements are laid before Parliament for review,and must be submitted to the Minister of Finance within thestatutory deadline on 31 March of each year and thereaftertabled in Parliament. PIDM accordingly reports, on an annualbasis, to Parliament through the Minister of Finance. As partof our accountability framework, we have the following keyprocesses and comply with the following standards:

• we provide our financial statements to the Treasuryon a quarterly basis. Going forward, we plan to alsoprovide quarterly updates on our performance againstour initiatives as stated in our Corporate Plans;

• we comply with applicable financial reportingstandards, as required by law. This is to ensure thereliability, consistency and transparency of ourfinancial information. We provide additional financialinformation under our Management’s Discussion andAnalysis in our Annual Report;

• we have a Board Governance Policy, developed frominternational and domestic principles and standards ofbest practice. This allows our Board to demonstrateits achievements against these standards, as set out inour Statement on Governance (page 31);

• we have governance processes to ensure that wehave two-way communications with our stakeholderswhen making guidelines and regulations. Our policiesrequire us to carry out our decision-making in astransparent a manner as possible,within the constraintsof our confidentiality provisions under the MDIC Act.This allows us to balance and respond to ourconstituents’ needs and concerns and allows forsound decisions and policies;

• we have implemented a strategic planning process toset and develop effective strategies and clearcorporate objectives — which are results-oriented— as well as to monitor and report on performance.In 2006, we established the Balanced Scorecardperformance management system for our CorporatePlan 2007-2009. We have performance measuresagainst which to report. It will help us manage andtrack our performance, and to demonstrate that weare both efficient and effective; and

• we have made available, as indicated in our Statementon Governance (page 31), as many of our significantpolicies, codes and procedures for public reference,and will continue to do so.

II. Integrity Within the Organisation

Governance in the public sector, as noted earlier, is alsoabout control, behaviour and reporting at the highest levelsof an organisation.We regard our governance framework asbeing inextricably intertwined with the conduct and ethicsof individuals within the organisation. A statutory bodywith individuals that exhibit high standards of integrity canbetter achieve its objectives. And more so for PIDM,given that one of our statutory objects is to promote andcontribute to the stability of the financial system.

In 2006, we focused on the infrastructure for our ethicalframework. Our conduct and ethics framework addressesthe behaviour of our employees, as well as our Boardmembers. Our framework is underpinned by the principlesof objectivity, impartiality and integrity. We have codesand policies on behaviour and ethics and proceduralsafeguards, all with a view towards ensuring that we arecommitted to high standards of behaviour.

The key codes and policies to this end include the Codeon Business Conduct and Ethics for employees andDirectors respectively, the Conflict of Interest Code andthe Procurement, Contracting and Outsourcing Policy.

In outline:

The Code on Business Conduct and Ethics foremployees reiterates our corporate values, sets out theprinciples underlying the Code and spells out expectedstandards of behaviour. A breach of this Code has severalconsequences, ranging from warnings to dismissaldepending on the seriousness of the breach. In addition,steps are taken annually to review and assess compliancewith the provisions of the Code.

The Code on Business Conduct and Ethics for the Boarddemonstrates the Board members’ commitment toexercise leadership and to apply the same level ofexpectations on themselves.

The Conflict of Interest Code requires individuals withinthe organisation to avoid being influenced by bias,prejudice and to avoid or resolve conflicts of interests. Inessence, the Code insists that individuals are not to usetheir position in the organisation to further their privateinterests. The importance of this Code is underlined bythe MDIC Act – which singles out a breach of anyprovision of this Conflict of Interest Code as an offence.Notable provisions include a prohibition against holdingshares in member institutions or entities related tomember institution, a requirement for employees to


OUR GOVERNANCE FRAMEWORK OUR GOVERNANCE FRAMEWORK

INTRODUCTION

What constitutes good governance is an important questionfor us, as a statutory body and as a deposit insurer.This article explains why we place governance at the heartof all that we do, and how we intend to do it.

Broadly, corporate governance refers to processes, rules andpractices by which organisations are directed, controlled andheld to account. Underpinning these are, of course, theprinciples of openness, integrity and accountability. In thecontext of the public sector, governance is about structuresand processes for decision-making, accountability, controland behaviour at the highest levels of an organisation1.

Our function as a statutory body means that we must have,first and foremost, “institutional integrity”. By “institutionalintegrity”, we mean having sound governance and the highestof internal standards engrained throughout our Corporation.In this article, we describe how we have set about doingthis since our establishment some 16 months ago. We willalso describe how we see ourselves going forward.

Institutional integrity is very much in line with ourCorporate Vision. Our Corporate Vision is to be the mosteffective deposit insurer in South East Asia by 2008 and tobe recognised internationally as one of the leading depositinsurers in the world by 2010. We note, in particular, thatthe International Association of Deposit Insurers (“IADI”)has acknowledged the importance of effective governancefor deposit insurers and plans to issue guidance on goodgovernance for deposit insurers. Developments such asthese put a spotlight on governance and give us all the morereason to focus on being a leader in this area.

STANDARDS OF ACCOUNTABILITYFOR A STATUTORY BODY

The work of statutory bodies has a significant impact onthe community. There is no specific set of governance andaccountability policies applicable to statutory bodies, thoughthere may be broad recommendations and principles onaccountability in the context of public sector entities2.

For companies in the private sector, it is clear what theprimary role of the corporate board is, and to whom it isaccountable.The Board represents its shareholders, and it isto shareholders that the corporate board is accountable.

For a statutory body the position is more complex. OurBoard’s broad goals are clear from our mandate and thepowers conferred on them as set out in the MalaysiaDeposit Insurance Corporation Act 2005 (“MDIC Act”).However, our stakeholders are many and their interests arevaried.What is more, not all statutory bodies operate withinthe same legislative framework or have the same businessmodels. Accordingly, the model of governance andaccountability framework, while guided by similar principles,would need to address unique features of each such entity.

How then, is PIDM accountable to its stakeholders? In ourview, the very first step lies in articulating our accountabilityframework, so that it is clear in our minds and the minds ofothers.This would then allow our stakeholders to assess theorganisation’s level of credibility and integrity and howefficient and effective we are in meeting PIDM’s statedmandate and objectives.

OUR ACCOUNTABILITY FRAMEWORK

The design of the MDIC Act and our explicit objects clearlycontemplate the need for PIDM to operate in a vigorous andenterprising manner. In keeping with the MDIC Act, PIDM isto operate as a separate legal entity, invested with a wideranging set of powers. This flexibility and range of powersenable us to achieve our mandate, which includes protectingdeposits, providing incentives for risk management as well aspromoting the stability of the financial system and to meetthese objects in a manner so as to minimise losses to thefinancial system.

Given this flexibility and wide powers, we are keenlyaware of the need to operate within a strong frameworkof effective governance and accountability.The crux of thematter lies in the answer to the following question —How do we achieve a balance between our flexibility tomanage our business and affairs and the legitimate interestsof our stakeholders?

We see the key elements of governance and accountabilityframework in the following terms. First, our accountabilityframework defines how we report and answer for ourperformance to our stakeholders externally. Second,the success of our governance lies in the integrity withinour organisation.

“Effective governance is ... essential for buildingconfidence in public sector entities - which is itselfnecessary if public sector entities are to be effective inmeeting their objectives.”

Governance in the Public Sector: A Governing Body Perspective, by theInternational Federation of Accountants (August 2001).

1 The study on Governance in the Public Sector: A Governing Body Perspective, by the International Federation of Accountants (August 2001).

2 In the form of the IFAC Study mentioned in footnote 1.


1 The Financial Stability Forum was established to promote international financial stability through information exchange and internationalcooperation in financial supervision and surveillance

declare assets and loans and facilities from memberinstitutions, as well as deposits held in member institutionsof RM60,000 or more, and a process for Directors todeclare personal interests in business entities that haveor may have transactions with the Corporation. Allemployees are required under the Code to annuallyconfirm that they have reviewed and understood theCode and are in compliance with the same.

Our Procurement, Contracting and Outsourcing Policyrequires employees dealing with suppliers to demonstratehigh standards of competence and integrity, withsuppliers being selected on the basis of quality,competence and value for money. We expect ouremployees to avoid being obliged or appearing to beobliged to suppliers. We also expect them to ensurethat contracting procedures are followed, that we havemet our contractual obligations, and that they shouldobtain, from the suppliers, the expected quality orspecified standards.

We would, however, emphasise that our ethical frameworkdoes not — and should not — stop at words. Soundconduct and ethics must be consciously engrained in theday to day practices and culture of every individual inthe Corporation.

Our plans to institutionalise integrity include the following.Training and communication about the codes and ethics-related matters will continue on an ongoing basis.We havechannels for employees to discuss ethical issues. In addition,there are processes in place to remind employees of theirobligations to comply with such codes and policies, and toalso help identify wrongdoing and transgressions of ethics, inthe form of the Policy for Disclosure of InformationConcerning Wrongdoing in the Workplace. Employees areencouraged to blow the whistle whenever they spot orsuspect wrongdoing. We have established our concernraising process which allows both employees and anyone

else to file complaints. Individuals who, in good faith, reportany apparent or actual violation of codes or the law areprotected from retribution under our Policy.

To ensure effectiveness of these codes and policies, we willclearly take prompt action to deal with any transgressions.

As stated in our Board Governance Policy, “Integrity isdependent, among other things, on the personal standardsand professionalism of the individuals within the entity.”We firmly believe in practising what we preach. Leadershipgives the greatest incentive for others to want to be partof the culture our codes represent. Senior management isthus accountable for upholding — in actions and not bymere statements of intent — the highest standards ofintegrity that our Codes represent.

CONCLUSION

In 2006, we have implemented many policies and practicesto help us build a strong governance foundation.We havealso used the checklists drawn from international studies3

as well as recent domestic work4, to identify areas wherefurther developments may be necessary. Our GovernanceCommittee Charter also requires that we review ourgovernance structures on a regular basis. Going forward,we will also review our framework against developments,including for example, the IADI proposed guidance ongovernance in deposit insurers.

We take the view that some box-ticking is good. It helpsensure we have taken into account important matters. Moresignificantly, however, we also acknowledge that mindsetis not easily regulated.This depends on the standards andculture we promote right through our organisation.

Ultimately, we aim to demonstrate that in PIDM, governancewill not be relegated to mere theories. Its principles are andwill continue to be upheld and practised. As a statutorybody invested with considerable responsibilities, this, webelieve, is critical to the achievement of our goals. Thismeans, as we said at the beginning, that governance must lieat the heart of all that we do.

Governance at the heart of all that we do.

COMPLIANCE WITH BEST PRACTICES

OUR AIM

PIDM is an important component of the financial safety netsince it is mandated to promote and contribute to thestability of the financial system. Our primary function, asstated in our incorporating statute, is to protect depositors,promote confidence in the Malaysian depositing public andpromote sound risk management in our financial system.

UNEQUIVOCAL COMMITMENT TOEXCELLENCE

Building credibility and public confidence in our depositinsurance system is crucial to the achievement of our mandate.

We see the implementation of best practices as an effectiveway to build a model deposit insurer. Accordingly, we arecommitted to implementing best practices in all aspects ofour operations. In pursuit of excellence, we have beenbuilding our operational capacity and capabilities to bestpractice standards for the past 16 months.

WHICH BEST PRACTICES?

The most relevant best practices for deposit insurers areembodied in the Financial Stability Forum’s Guidance forDeveloping Effective Deposit Insurance Systems, September20011 (“FSF Guidance”).

Our statutory mandate, powers, governance structureand the design features of our deposit insurance systemare aligned with the best practices recommended by theFSF Guidance.

What we have accomplished so far in terms of establishingbest governance practices is discussed in our Statementon Governance (page 31) and Our Governance Framework(page 101).

At the operational level, we have also adopted standards andguidance set by internationally recognised bodies. In areaswhere there are no published best practices, we have applied(insofar as is relevant) recognised industry principles or bestpractice models with a view to promote greater governance,transparency and good stewardship. Our report card, todate, is as follows.

HOW DOES PIDM MEASURE UP?

DEPOSIT INSURANCE

We are pleased to report our compliance with the majorityof best practices in the guidance issued by the FSF. We havebeen fortunate, in that Bank Negara Malaysia (“BNM”) —which was responsible for our establishment — saw to itthat many of the FSF Guidance points for developing aneffective deposit insurer were embedded into the MalaysiaDeposit Insurance Corporation Act 2005 (“MDIC Act”).This has set the tone for our development.

During the first three years of our existence, we shallimplement the organisational structure and frameworkrelevant to the business and affairs of a loss-minimiser depositinsurer. In particular, we shall be developing policies, systems,practices and processes in the areas of funding, intervention,failure resolution and reimbursement of depositors’ claims.Please see our accomplishments for the last 16 months inthe Appendix on Self-Assessment of Compliance with FSFGuidance (as at 31 December 2006), page 107.

We have also filed our self-assessment on our compliancewith the FSF Guidance with the International Monetary Fund(“IMF”). This compliance report was made in conjunctionwith the IMF Article IV Consultation and study visit held inNovember 2005. IMF noted that we complied with allrelevant best practices.

ACCOUNTING AND FINANCIAL MANAGEMENT

Transparency and financial accountability are integral tobuilding credibility. We have adopted the applicableFinancial Reporting Standards (“FRS”), namely theApproved Accounting Standards in Malaysia for EntitiesOther Than Private Entities issued by the MalaysianAccounting Standards Board. These standards are in linewith the International Financial Reporting Standards(“IFRS”) issued by the International Accounting StandardsBoard (“IASB”). Please see Section IV.

We also adopted other best practices in financialreporting. We have provided an extensive Management’sDiscussion and Analysis section in our Annual Report(page 47). This included detailed information on ourperformance against plan, our risks and how our futureactivities are expected to affect our business results.Additionally, we have provided detailed disclosures in the

“A Code is useless unless the people it covers first,know it exists and what it says; second, understandhow it should affect the way they carry out theirduties; and third, actively want to be part of theculture it represents.”

Sir Nigel Wicks, Chair, “Ethics in Public Life”, Committee onStandards in Public Life (Nolan Committee), in his speech to theInstitute of Business Ethics, 19 September 2002

3 Governance in the Public Sector: A Governing Body Perspective, by the International Federation of Accountants (August 2001),Appendix 1: Good Governance:A Checklist For Governing Bodies.

4 The Putrajaya Committee on GLC High Performance’s Green Book on Enhancing Board Effectiveness (Green Book) (April 2006)

OUR GOVERNANCE FRAMEWORK

105 106

to fulfil our mandate, particularly when dealing withconfidential information relating to member institutionsand depositors.

In December 2006, our Board approved the principles forthe development of an IT Governance framework to guideus on how our IT initiatives, investments and operationswill be managed as well as ensuring that our IT strategiessupport our business goals. This framework draws fromseveral internationally recognised IT governance guidanceand standards, such as Information Technology InfrastructureLibrary (“ITIL”), ISO/IEC 17799:2005 — Code of Practice forInformation Security Management, and Control Objectives forInformation and related Technology (“COBIT”).

To ensure compatibility with local IT environment, PIDMhas also adopted relevant local guidance and standardssuch as, the Malaysian Public Sector ICT ManagementSecurity Handbook (“MyMIS”) and BNM’s Guidelines onManagement of IT Environment (“GPIS 1”). PIDM’s ITGovernance framework covers all aspects of ITmanagement, including, systems and security administration,IT operations management, systems development as well asdisaster recovery planning and facilities.

Our IT Steering Committee was established in January 2007to ensure the sound management and implementation ofour IT strategy.

Our IT Governance framework will be developed in stagesand will reflect best practice IT Governance processesacross the organisation. It will, of course, also dovetail withour ERM model.

GOING FORWARD

We intend to continue to demonstrate that we are wellgoverned and well managed by reporting our compliancewith the relevant international best practices. We willregularly benchmark ourselves so that we may identifyany gaps in compliance and address these gaps over thecourse of time.

We also recognise that international best practicescontinually evolve. In a dynamic environment, there may bechanges in the environment and the issuance of newstandards and best practices that may impact on thegovernance and operations of our deposit insurancesystem. As such, we plan to implement a continuousimprovement process. This will involve the identificationand analysis of changes in environment and issues thathave a bearing on our governance and operations, and alsoensure that the best practices we have adopted remaincurrent and relevant.


Notes to the Financial Statements, which are over andabove the minimum required disclosures of the approvedaccounting standards.

The Auditor General of Malaysia is our external auditor.Further, we would note that, in managing our Islamic DepositInsurance Fund, we comply with Shariah requirements as setout in the MDIC Act.

Additionally, the Chief Executive Officer and the ChiefFinancial Officer have made a statutory declaration that, tothe best of their knowledge and belief, the financialstatements are correct. This is best practice in financialreporting although not common in most countries. Pleaserefer to Section IV for details on the declaration and thebasis for which it is made.

AUDIT AND INTERNAL CONTROLS

We have established a strong internal audit function. OurAudit and Consulting Services Charter adopts thestandards of the Professional Practice of Internal Auditing andthe Code of Ethics issued by the Institute of InternalAuditors Inc. USA (“IIA”). To promote a sound internalcontrol environment, our internal control framework isbeing developed based on the model devised by theCommittee of Sponsoring Organizations of the TreadwayCommission (“COSO”).

Our audit activities will include an assessment of theextent of our compliance with applicable legislation andethics within our organisation. Commencing in 2007, weshall also report on a yearly basis on the effectiveness ofour internal control framework, in line with best practices,for example the UK’s Financial Reporting Council’s InternalControl Revised Guidance for Directors on the Combined Code.

In line with international best practices, we plan to appointan external assessor to undertake a quality assurancereview on our compliance with the IIA standards and ourinternal auditing procedures in 2009.

ORGANISATIONAL ENTERPRISE RISKMANAGEMENT

Our mandate includes promoting sound risk managementin the financial system.We expect our member institutions

to have in place prudent risk management systems,including the adoption of a systematic approach towardsrisk management. We are considering the merit ofincorporating certain requirements on risk managementinto our regulations on ‘Terms and Conditions ofMembership’, which are currently being developed.We believe that our credibility in this regard with memberinstitutions also hinges on our ability to demonstratethat we “walk the talk” by adopting best practices on riskmanagement ourselves.

In line with international best practices and as part ofgood management practice, we will develop and begin, in2007, the implementation of an enterprise risk management(“ERM”) framework to ensure and demonstrate that all oursignificant enterprise-wide risks are being consistently andcontinuously identified, assessed, managed, monitored andreported on a consolidated basis. We plan to adopt theAustralian/New Zealand Standard 4360:2004 as theprimary standard for our risk management framework andas a generic guide for establishing and implementing therisk management process. We will also use the COSO’sEnterprise Risk Management — Integrated Framework as abenchmark to evaluate and improve our enterprise riskmanagement processes. An outline of our framework hasbeen approved by the Board in December 2006.

Our ERM framework will enable us to manage oursignificant risks more effectively through better focusand management of resources based on our priorities.Also, in line with our mandate of promoting sound riskmanagement, the framework will provide a systematicapproach that will allow us to demonstrate that we aremanaging our risks well.

We shall also develop an appropriate internal reportingsystem so that our Board of Directors can obtain on aregular basis, reasonable assurance that the Corporation is“in control” of its risks.

INFORMATION TECHNOLOGY AND DATASECURITY

The nature of our business and our business model meanthat information technology (“IT”) is a critical componentof our operations. A comprehensive and secure ITinfrastructure allows us to build the capacity and capability

COMPLIANCE WITH BEST PRACTICES COMPLIANCE WITH BEST PRACTICES


APPENDIX:

SELF-ASSESSMENT OF COMPLIANCEWITH FSF GUIDANCE

PIDM, as a matter of policy, annually evaluates its compliance with international best practices on deposit insurance. In thisarea, PIDM has benchmarked itself against guidance issued by the Financial Stability Forum’s Guidance for Developing EffectiveDeposit Insurance Systems (“FSF Guidance”).The following is our self assessment against these best practices as at 31December 2006.

1.

Moral Hazard

Contextual Issues

FSF KEY POINTS OF GUIDANCE KEY POINTS OF COMPLIANCE


Public Policy Objectives

3.2.

a) Explicit, limited-coverage deposit insurance ispreferable to implicit protection if it clarifies theauthorities’ obligations to depositors and limits thescope for discretionary decisions that may result inarbitrary actions.

b) A Deposit Insurance System (“DIS”) can deal with alimited number of simultaneous bank failures, butcannot be expected to deal with a systemic bankingcrisis by itself.

business activities, a fit-and-proper test for controllingshareholders, standards for risk management, stronginternal controls and external audits.

Supervisory discipline can be exercised by ensuringthat banks are monitored for safety and soundness aswell as compliance issues and that corrective actionsare taken promptly when problems surface, includingthe closure of banks when necessary.

b) Good corporate governance and sound riskmanagement of individual banks help to ensure thatbusiness strategies are consistent with safe-and-soundoperations, and thus can act as the first line of defenceagainst excessive risk taking.

Regulatory discipline can be exercised through effectiveregulation covering the establishment of new banks,the imposition of minimum capital requirements, thequalifications of directors and managers, sound

c) Ensuring that a DIS contains certain design featurescan also mitigate moral hazard … including placinglimits on the amounts insured; excluding certaincategories of depositors from coverage; using certainforms of coinsurance; implementing differentialor risk-adjusted premium assessment systems;minimising the risk of loss through early closure oftroubled banks; and demonstrating a willingness totake legal action, where warranted, against Directorsand others for improper acts.

Complied.a) Moral hazard is minimised by providing explicit limited

coverage on deposits, giving incentive for depositorsto monitor the financial health of banks. In addition,the Malaysian financial system is well regulated andsupervised by the central bank, BNM, under therequirements of the Banking and Financial InstitutionsAct 1989 (“BAFIA”), the Islamic Banking Act 1983(“IBA”), and among others, prudential guidelines andstringent governance requirements. The depositinsurance system and the prudential regulatory andsupervisory system are well aligned by design.

b) Good governance and sound risk management ispromoted through compliance with the 25 CorePrinciples of Effective Supervision and Basel II as wellas minimum requirements on risk managementthrough guidelines and standards issued by BNM.(See comments on guidance 4 for examples ofguidelines issued). PIDM will further promote goodcorporate governance and sound risk managementthrough its differential premium systems that will beimplemented in 2008 which will have elements of

Complied.a) PIDM administers two explicit limited coverage

deposit insurance systems, conventional and Islamic,under one statutory body. The MDIC Act stipulatesthe coverage limit, mandate, powers and PIDM’sobligations to depositors.

b) PIDM, in meeting its legislated obligations, is empoweredto assess and collect annual premiums from its memberinstitutions and to build its Deposit Insurance Fundsover time. PIDM also has powers to borrow funds fromthe Government, issue debt and guarantees to meetits obligations to depositors. As a statutory body,PIDM is developing its capacity and capability to dealwith bank failures. It will fulfil its mandate and providesupport to the Government in dealing with a systemicbanking crisis should such a crisis occur in future.

qualitative and quantitative risk assessments,including the supervisor’s ratings.

The Minister of Finance, upon the recommendationof BNM, approves new banking licences pursuant toBAFIA and IBA, which also stipulate minimum criteriafor Directors and senior management of financialinstitutions. Specifically, the appointment of directorsand the chief executive officer requires BNM’sapproval. BNM’s Guidelines on Directorship in theBanking Institutions (“BNM/GP1”) in addition to layingdown parameters for an effective Board, also includethe requirements for establishing an Audit Committeeand its responsibilities, oversight of the internal auditfunction and external audit.

As the primary regulator, BNM exercises bothregulatory and supervisory discipline pursuant toBAFIA and IBA. Banks are subjected to offsite andon-site monitoring, with regular examinations byBNM. The BAFIA and IBA also provide BNM withthe power to intervene or to close banks.

c) The DIS covers only commercial and Islamic banks,with coverage limit of RM60,000, inclusive ofprincipal and interest/return, per depositor perinstitution. Certain types of products are excludedfrom coverage.

To minimise risk of loss, the MDIC Act provides fora non-viability trigger by BNM and a minimum costmandate in dealing with troubled member institutions.

a) A well designed financial safety net contributes to thestability of the financial system; however, if poorlydesigned, it may increase risks, notably moral hazard.Good corporate governance and sound riskmanagement of individual banks, effective marketdiscipline, and frameworks for strong prudentialregulation, supervision and laws, can mitigate moralhazard and these elements are most effective whenused in concert.

Complied.a) PIDM’s public policy objectives are clearly set out in

the MDIC Act. PIDM’s mandate is to: administer aDIS; provide insurance against the loss of part or allof deposits; provide incentives for sound riskmanagement; and promote or contribute to thestability of the financial system. PIDM must also act tominimise cost to the financial system. The DISchosen was based on the needs of the financialsystem in Malaysia.

b) A policy decision is already in place for such reviewsonce every five years.

a) In designing a DIS, the first step is to identify thepublic policy objectives … and these objectives mustbe understood.The principal objectives for DIS are tocontribute to the stability of the financial system andto protect less-financially-sophisticated depositors.The choice of how a DIS is to be operated dependson many factors that are unique to each countryand its governmental and financial systems.

b) A continuous improvement process should exist forreviewing the extent to which a DIS is meeting itspublic-policy objectives and its mandate.



7.

Mandate and Powers

Self Assessment Methodology

Structure

8.

a) Whatever the mandate selected, it is critical thatthere be consistency between the stated objectivesand the powers and responsibilities given to thedeposit insurer.

b) Formally specifying the mandate of a deposit insurer(either in law, in a formal policy statement, anagreement or by private contract) clarifies the roleof deposit insurance within the financial safety net.

c) A deposit insurer should have all powers necessary tofulfill its mandate. All require the ability to enter intocontracts, set appropriate requirements, and accesstimely and accurate information to ensure that theymeet their obligations to depositors promptly.


Governance

9.

6.Complied.A thorough analysis was done by a multi-disciplinaryteam, taking into account many areas, such as economicsituation, strength and position of the banking systemand future developments.

5.

Situational Analysis

4. a) Policymakers should conduct a situational analysiswhen adopting or reforming a DIS … examineconditions and factors, such as … level of economicactivity; current monetary and fiscal policies; …accounting and disclosure regimes.

b) Identify gaps and … evaluate options sincedeposit insurance … not a remedy to deal withmajor deficiencies.

c) DIS cannot be effective if relevant laws do not exist orif the legal regime is characterised by inconsistencies.

d) The strength of prudential regulation and supervisionwill have implications for the effectiveness of a DIS.Strong prudential regulation and supervision shouldallow only viable banks to operate. Banks should bewell capitalised and follow sound and prudent riskmanagement, governance and other business practices.

a) When transitioning, … pay particular attention topublic attitudes and expectations. Countries withhigh capital mobility … should consider the effectsof different countries protection levels and otherrelated policies.

b) If a country decides to transition from a blanketguarantee to a DIS, the transition should be as rapidas a country’s circumstances permit.

Complied.The DIS was implemented on 1 September 2005concurrent with the withdrawal of the Governmentblanket guarantee on deposits issued in January 1998.There was a clean cut off and the transitioning wassmooth, with no adverse reaction from the public.

This tool could be used to design, implement, modifyand continuously assess a DIS.

Policymakers must determine whether the depositinsurance function should be assigned to an existingorganisation or whether a separate entity should beestablished. Regardless of how the DIS is structured, itis vitally important to set clearly the responsibility andaccountability of each safety-net function.

a) The form of governance utilised in a DIS should reflectthe mandate and the degree to which the depositinsurer is legally separated from the other financialsafety-net participants.The governing body … shouldinclude individuals with requisite knowledge tounderstand the organisation’s activities and theenvironment in which it operates and have theauthority to make decisions. The deposit insurershould have access to the input and views of theother safety-net participants and relevant interestedparties. Members of the governing body andmanagement of the deposit insurer should besubject to a fit-and-proper test, and they should befree from conflicts of interest.

Transitioning from a Blanket Guarantee to a Deposit Insurance System

Complied.A sound process was followed in the design of the keyfeatures resulting in a clear fit with the statutory objectsand country needs. One key mandate of PIDM is toprovide incentives for sound risk management in thefinancial system to support the role of BNM.

In designing the system, factors considered include thesize of the financial system, level of supervisory disciplineand avoidance of duplication of unproductive regulatoryand supervisory functions and the need to establish acost minimiser deposit insurer.

The banking sector is required to comply with prudentialstandards that are consistent with internationalpractices.These include: (1) Minimum Standards for RiskManagement Practices on Derivatives; (2) Best Practiceson the Management of Credit Risk; and (3) Market RiskCapital Adequacy Framework: Incorporation of MarketRisk into the Risk-Weighted Capital Ratio. There existsa strong regulatory and supervisory system and banksare required to be well capitalised and need to followsound and prudent risk management, governance andother business practices.

Complied.PIDM is an independent statutory body established byan Act of Parliament with a clear mandate and relevantpowers which are stated in the MDIC Act. PIDM ismanaged by an independent Board of Directors and isaccountable to Parliament through the Minister of Finance.See comments to guidance 7 for mandate and powers.

Complied.a) The MDIC Act sets out clearly the governance

structure and the role and powers of the Board ofDirectors. The Board of Directors, comprise fivedirectors and two ex-officios, namely the SecretaryGeneral of Treasury and the Governor of BNM. Theyare required under the MDIC Act to act honestlyand in PIDM’s best interest, at all times, and to usereasonable diligence in the discharge of their duties.Appointees are subjected to a “fit and proper” testthat stipulates stringent financial and characterdisqualification criteria. Members of the upper orlower houses of Parliament or any LegislativeAssembly, an officer of a member institution orpersons holding the post of divisional head or anyperson who holds any similar office or position, of anypolitical party, are disqualified. Clear Conflict ofInterest Codes are also in place for employees andBoard members and compliance to such codes isconfirmed through annual compliance reports.

Complied.The mandate and powers of PIDM are stated in the law.PIDM has appropriate powers to meet its mandate.For example, although it does not conduct examinationof banks, it receives all written reports from BNM onthe results of each examination together with anassessment of the safety and soundness of eachmember institution. PIDM also gets access to othernecessary information from BNM through the StrategicAlliance Agreement (“SAA”).

The roles of BNM and PIDM are clear. In a failureresolution, there is a clear demarcation of authorityand action. BNM remains the sole supervisor andmakes a determination of the non-viability of amember institution before PIDM can utilise itsresolution powers. Such trigger provides a mechanismfor PIDM to act to find a solution in a manner tominimise the losses to the financial system. PIDM istherefore responsible for the resolution of a memberinstitution once it is determined as non-viable byBNM. PIDM is also empowered to take pre-emptiveactions, such as acquisition of assets of a troubledbank, to reduce or avert a risk to the financial systemor a threatened loss to PIDM.

APPENDIX:




1 Source: Bank Negara Malaysia Annual Report 2005, page 110.

Membership

Coverage


Human Resources and Statutory Indemnification

Interrelationships Among Safety Net Participants

b) Governance systems and practices should bedeveloped on basis of sound strategic planning, risk-management processes, and good internal controland audit systems. The governance system shouldbe transparent and subject to clear oversight andaccountability. Rules specifying corporate governancepractices should be developed.

b) A Board Governance Policy has been developed andpublished.This policy sets out 15 Standards covering,among others, Board independence, effectivenessand responsibilities, behaviour and ethics, riskmanagement control environment and internal audit,and strategic management process. During 2006,PIDM has focused on putting in a strong governancefoundation and it provides public disclosure of itssystems and practices. PIDM has also established astrong and independent internal audit function.PIDM’s accounts are externally audited by the AuditorGeneral for Malaysia and its financial statements andAuditor’s Report form part of its Annual Reportwhich is required to be tabled in Parliament and madepublic. An integrated enterprise risk managementframework will be implemented starting in 2007.

10. a) The ability to attract and retain qualified employeesis a key challenge for most deposit insurers.Deposit insurers may meet this challenge by: useof dedicated resources, access to the resourcesof other financial safety-net participants and/orreliance on outside providers.

Complied.a) PIDM has the ability to attract and retain qualified

employees given its comprehensive compensationand performance system. It also providesopportunities for training and development for itsemployees to build the necessary skills andexpertise in all its core functions. PIDM is also ableto retain outside service providers when requiredto support its objectives and initiatives.

b) Statutory indemnification is provided for PIDM Boardmembers and officers under Section 98 of the MDICAct for any actions done in good faith.

Complied.The safety net functions are well defined in law.

PIDM and BNM has formalised information sharingarrangements and working relationship in a writtenagreement. It provides PIDM with access toinformation on member institutions pertaining to theirfinancial health including safety and soundness matters.This agreement is also in line with the February2004 APEC Policy Dialogue on Deposit Insurancerecommendation on formal safety net players’interrelationship arrangements on information sharing.

a) When a single organisation performs all of the safetynet functions, the smooth resolution … is dependenton clarity of mandates and an adequate accountabilityregime … However, when the functions are assignedto different organisations, issues related toinformation sharing, allocation of powers andresponsibilities, and coordination of actions … is morecomplex and need to be addressed clearly and explicitly.

b) A deposit insurer’s information needs varysignificantly according to its mandate and powers,but the need for close coordination and informationsharing … is essential …

c) It is highly desirable to formalise information-sharingarrangements …

11.

Complied.BNM applies entry criteria and minimum prudentialstandards for new banks. Membership in the depositinsurance system is automatic and compulsory for alllicensed commercial banks and Islamic banks.

Excluded from membership are: (1) investment banksdue to the wholesale nature of their deposits; (2) foreignbranches of domestic banks; (3) development financialinstitutions as they are either statutory bodies orgovernment-backed; (4) insurance companies which areseparately covered under the Insurance Act 1996;and (5) provident and pension funds, cooperativesocieties, housing credit institutions and buildingsocieties not regulated by BNM.

The approach taken is to provide coverage to thecommercial and Islamic banks since they account for87.5% of total deposits of the financial system1, invalue terms.

a) Membership should be compulsory to avoidadverse selection.

b) Policy makers should determine whether eligiblebanks will be given membership automatically orwhether they should apply for entry … to controlthe risks it assumes by establishing entry criteria.

c) Appropriate membership mechanisms are necessary toensure membership requests are handled expeditiouslyand that eligible banks are required to meet minimumprudential standards and entry requirements.

d) Policymakers take different approaches in decidingwhich financial institutions should be covered bydeposit insurance.

12.

13. a) Policymakers should define clearly in law or by privatecontract what is an insurable deposit.

Complied.a) Eligible deposits are defined in legislation. These

include current and savings deposit accounts, fixedterm deposits, banker’s cheques and bank draftsdrawn or made against a deposit account. Non-eligible deposits include deposits not payable inMalaysia, foreign currency deposits, money marketdeposits, negotiable instruments of deposit, otherbearer deposits and repurchase agreements. PIDMis also empowered to include or exclude productsto be designated as deposits.

b) Two surveys were conducted to assess theappropriate coverage limit which took intoaccount the type of depositors, account type anddeposit size of accounts.

c) The limit is set at RM60,000 per depositor per bank.

b) The level of coverage can be set through anexamination of relevant data such as statisticalinformation describing the size distribution ofdeposits held in banks.

c) Given the importance of effectively limiting coverageand contributing to financial system stability, as well askeeping the requirement for information reasonable,it is preferable to apply deposit insurance on a perdepositor per bank basis.

d) One approach to foster market discipline and toreduce somewhat the costs of deposit insurance isthe use of co-insurance.This will provide individualsholding small account balances full protection againstthe risk of loss, while maintaining the incentive fordepositors holding larger account balances to monitorbanks. In order for co-insurance to be effective,extensive information needs to be provided to thepublic regarding the financial condition of banks.

d) Market discipline is provided by setting the coveragelimit at RM60,000. Amounts in excess of the limit arenot insured. In this regard, depositors holding smallaccount balances are protected fully against the riskof loss while maintaining the incentive for depositorsholding larger account balances to monitor theperformance of banks. Depositors can monitor thehealth of banks through their published financialstatements. Financial disclosure requirements on banksare consistent with international accounting standardsand practices. The financial statements must bepublished in at least two daily newspapers andexhibited throughout the year, in every office of a bank.

b) The importance of statutory indemnification shouldbe recognised and employees of the DIS shouldreceive legal protection against lawsuits for theiractions taken in good faith.

APPENDIX:


Membership


e) Coverage limits may need to be adjusted periodicallybecause of inflation, the growth of real income, thedevelopment of new financial instruments, and theway in which these factors influence the compositionand size of deposits.

f) The decision whether to cover deposits denominatedin foreign currencies depends heavily on a country’susage of foreign currency.

Funding

14.

e) As a matter of policy, PIDM will review theapplicability of its coverage limit every five years.A review on the coverage limit, in fact, is scheduledfor 2008. In addition, the MDIC Act provides forthe Corporation to approve new deposit productsfor insurability.

f) The amount of foreign currency deposits kept inMalaysia is very small. Hence, foreign currencydeposits are excluded.

a) A DIS should have available all funding mechanismsnecessary to ensure the prompt reimbursement ofdepositors’ claims.

d) The deposit insurer should ensure funds are wellmanaged and readily available to cover losses asthey arise.

e) In practice, DIS often are funded on a combinedex-ante and ex-post basis.

Complied.a) PIDM has available a broad range of powers and

options for ensuring that it can meet its obligations.Currently, it implements an ex-ante system but canlevy premiums on an ex-post basis. PIDM can alsoborrow from the Government or the market and canissue guarantees. PIDM is developing mechanisms forthe prompt and accurate reimbursement of depositclaims should a payout be necessary.

b) All member institutions pay annual premiums andtherefore pay the cost of providing deposit insurance.

c) PIDM is funded by premiums assessed on memberinstitutions, calculated based on total insured depositsas at 31 December of the preceding assessment year.This basis is applied equally to both conventional andIslamic member banks.

d) Funds are invested subject to legislated requirementsas set out in the MDIC Act and in accordance withour Board approved investment policy. The currentinvestment policy is to invest only in short-termRinggit denominated securities guaranteed by thegovernment or BNM.

e) Please see comments in (a) above.

b) Member banks should pay the cost of depositinsurance since they and their clients directlybenefit from having an effective DIS. However,policymakers should consider the effect of premiumlevels on the financial health of the banking industry.

c) Policymakers should choose an assessment baseagainst which a given premium rate will be applied.

APPENDIX:




Public Awareness

Cross-Border Issues

15.

16.

Failure Resolution

17.

g) Two separate funds are maintained for the Islamic andconventional deposit insurance system.The distinctionbetween the Islamic and conventional members doesnot result in competitive distortion.

h) The present flat premium system is being replacedwith differential premium systems planned for 2008.

Complied.PIDM provides information to the public using manychannels, such as our website, call centre, informationbrochures which are available at each branch of ourmembers and through seminars and road shows heldthroughout Malaysia. PIDM also developed its multi-yearIntegrated Communications Plan which is being launchedin 2007.

Not applicable.a) All foreign banks operating in Malaysia are required

to be incorporated as subsidiaries of their parentcompanies. Therefore, the issue of overlappinginsurance does not arise.

Complied.b) PIDM is empowered to enter into strategic alliances

with any person in furtherance of its objects. Presently,PIDM has not yet entered into such agreements.

a) Cooperation among the various financial safety netparticipants, both before and after a failure, is essentialif troubled banks are to be handled in a timely andeffective manner.

b) The determination … of when a bank is in seriousfinancial difficulty should be on the basis of well definedand transparent criteria by a safety net participant withauthority to act.Prompt and decisive actions are crucialto reduce cost … but … address confidentiality issuesto protect exchange of information …

b) BNM will notify PIDM of any bank that has ceased oris likely to cease to be viable. Criteria are beingdeveloped to be used in determining the non-viabilityof members.

Complied.a) The SAA executed between BNM and PIDM, is a first

among deposit insurers in terms of the depth andbreadth of cooperation between safety net players.

In order for a DIS to be effective, it is essential that thepublic be informed about its benefits and limitations.

f) PIDM plans to assess a steady premium rate over theforeseeable future. PIDM is aware of the merits ofmaintaining a target fund and will consider such a policyin due course.

f) In principle, there are two approaches available toestablishing a deposit insurance fund. One approach isto assess a steady premium rate over a long period,while the other involves developing a premium systemdesigned to maintain a target fund ratio or range.

g ) A case can be made either for establishing andmaintaining one fund or for establishing and maintainingseparate funds for different types of financialinstitutions that accept deposits from the public.

h) Policymakers have a choice between a flat-ratepremium system or a premium system that isdifferentiated on the basis of individual-bank riskprofiles. The basis and criteria used in a risk-adjusted differential premium system should betransparent to all participants.

a) If the host-country system provides supplementarycoverage, multiple reimbursements … should beavoided. The deposit insurance … by the home-country system should be recognised in thedetermination of levies and premiums.

b) Provided confidentiality is ensured, all relevantinformation should be exchanged between depositinsurers in different jurisdictions and … other foreignsafety net participants when appropriate.


APPENDIX:



Reimbursing Depositors


Depositor Ranking, Collateralisation and Rights of Set-off

20.Complied.a) The MDIC Act provides for deposits to rank in

priority above all other unsecured liabilities.

Claims and Recoveries

b) Systems and processes should be developed in orderto undertake preparatory reviews of deposit liabilitiesheld by troubled banks.

c) The reimbursement process should be evaluated ex-post to incorporate lessons learned.

18.

b) The implications of collateralisation were consideredat the drafting of the MDIC Act. However, as a matterof good governance, PIDM will continue to be mindfulof legislative developments in this area.

c) The issue of right of set-off was considered in thedesign features of the system. Since it would lead tounequal treatment and the matter could be addressedthrough administrative arrangements, right of set-offwas not included in the MDIC Act.

a) The deposit insurer should know, as soon as possible,when a bank will be closed. Access to the necessarydeposit data before the bank is closed lessens the riskof manipulation of records, shortens the time forcompleting the reimbursement process, and helpspreserve public confidence.

a) Policymakers should be aware of the potential effectsof existing depositor priority laws or statutes onfailure-resolution costs and the incentive for depositorsor other creditors to exert market discipline.

b) Policy makers should be aware of effects ofcollateralisation. Extensive collateralisation of abank’s liabilities may affect the deposit insurer’scost and impinge on its ability to provide financialassistance to a troubled bank.

c) Some countries emphasise the importance of set-offwhile others believe that it can contribute to unequaltreatment. These issues generally involve trade-offsand require country-specific solutions.

Work in progress for (b), (c) and (d)Asset management and disposition strategies will bedeveloped and will include these best practices.

Complied.a) PIDM is aware of the financial position of each of its

members and would be advised by BNM well in advanceof an impending or possible bank closure. PIDM isempowered to cancel or terminate membership if thelicence of a member institution has been surrenderedor revoked. PIDM may also terminate a membershipafter it has received a notification from BNM that themember institution has ceased, or, is likely to cease,to be viable.

Work-In-Progress b) Plans are in place to develop systems and processes to

undertake preparatory reviews and for reimbursingdepositors’ claims.

c) Post-mortems are a necessity if one wishes to learnfrom experiences and will be adopted as best practice.

c) An effective failure-resolution process should: meetthe deposit insurer’s obligations, ensure thatdepositors are reimbursed promptly and accurately,minimise resolution costs and disruption of markets,maximise recoveries on assets, settle bona fide claimson a timely and equitable basis, and reinforcediscipline through legal actions in cases of negligenceor other wrongdoings.

d) Three basic failure resolution options exist:liquidation and reimbursement of depositors’ claims;purchase-and-assumption transactions (sales); andopen-bank financial assistance. Bankruptcy … lawsmay heavily influence the choice of resolutionmethods … and, in some cases, may make a particularresolution method difficult to implement.

d) PIDM has extensive failure resolution powers setout in the MDIC Act. Among others, PIDM mayacquire shares, assume control of a memberinstitution and apply to the High Court to appoint areceiver and manager.

c) To protect depositors, the legislation requires PIDMto make reimbursements of depositors’ claims withinthree months of the obligation occurring anddepositors do not have to file claim forms. PIDM hasa broad range of resolution powers including assetacquisition and management. In resolving banks,PIDM is required to act in a manner to minimisecost to the financial system.

Complied.a) PIDM has appropriate legislative powers to deal with

claims and recoveries. As part of good management,several business options are being developed to meetall possible eventualities.

a) The powers provided to the entity responsible for theclaims and recoveries function should be guided byapplicable laws and include control of the failed bank’sassets; contract rights and privileges; the ability toallow or disallow claims; the capability to enforce orrepudiate certain contractual obligations; and the abilityto challenge fraudulent transfers and transactions.

19.

b) Asset management and disposition strategies shouldbe guided by commercial considerations and theireconomic merits ...

c) Transparency and access to information are keyfactors in marketing failed-bank assets.

d) Claims and litigation … against directors, officers… related to the bank failure are potentiallyimportant assets.

Perbadanan Insurans Deposit Malaysia 118117

ENTERPRISE RISK MANAGEMENT ENTERPRISE RISK MANAGEMENT

I

INTRODUCTION

All institutions are exposed to uncertainty or risks frominternal or external sources. Risk management sets out theprinciples or practices of good management of theseuncertainties. It involves establishing a system for identifying,measuring, monitoring and reporting on the potentialoccurrence of risky events. Its objective is to ensure that theinstitution’s risk exposures are managed and controlled withindesired boundaries. Having sound risk management practicesclearly helps address uncertainty or risks exposures withinthe risk appetite of an institution, and accordingly helpsmanagement to make better strategic and business decisions.

Enterprise risk management (“ERM”) is about ensuring thatall significant risks are identified and are being well managedin a systematic and consolidated manner.

THE IMPORTANCE OF ENTERPRISERISK MANAGEMENT TO US

At PIDM, we stress the importance of sound riskmanagement to enhance our governance system and see thelogic of having risk management dealt with on an enterprise-wide basis, and in involving the Board, Management andrelevant personnel.

In our Board Governance Policy, the Board has recognised itsresponsibility to:

i) Obtain an understanding of the principal risks of theCorporation’s business;

ii) Ensure that appropriate and prudent risk managementsystems to manage these risks have been implementedand are reviewed regularly; and

iii) Obtain reasonable assurance, on a regular basis, thatsystems are being adhered to and to continue toeffectively manage the risks affecting the Corporation,

so as to help the Board to determine that the Corporationis “in control”.

In 2006, the Board approved the approach for implementingan ERM framework within our organisation. This has beenidentified as one of our key initiatives in the Corporate Plan2007-2009.

ERM, as we explain below, is also important to us, in relation toour statutory mandate,which requires us to provide incentivesfor sound risk management within the financial system.

THE RELEVANCE OF ERM TO OURBANKING INSTITUTIONS

ERM in the context of banking institutions cannot be discussedin isolation from the environment in which an institutionoperates. In particular, we see ERM as increasingly relevant inthe context of the expected implementation of Basel II inMalaysia beginning 2008.

The Basel II, developed in 2004 by the Basel Committee onBanking Supervision (“BCBS”), replaced the originalinternational bank capital accord (“Basel I”). The fundamentalobjectives of Basel II are to improve the consistency ofcapital regulations internationally, to make regulatorycapital more risk sensitive, and to promote enhancedrisk-management practices. BCBS envisages that theimplementation of the framework will strengthen thesoundness and stability of the banking system, because therevised capital adequacy standards will ensure that thefinancial resources held by banking institutions correspondwith the risks associated with the business profile andcontrol environment within the institution.

“Enterprise risk management is a process, effected byan entity’s board of directors, management and otherpersonnel, applied in strategy setting and across theenterprise, designed to identify potential events thatmay affect the entity, and manage risk to be withinits risk appetite, to provide reasonable assuranceregarding the achievement of entity objectives1”

The new framework consists of three ‘pillars’. Pillar 1 of thenew standards sets out the minimum capital requirementsinstitutions will be required to meet for credit, market andoperational risks. Pillar 2 exhorts institutions and supervisorsto take a view on whether an institution should holdadditional capital against risks not covered in Pillar 1 and totake action accordingly. Pillar 3 aims to improve marketdiscipline by requiring institutions to publish certain detailsof their risks, capital and risk management.

Despite its complex architecture, the implementation of thenew framework provides a number of options and flexibilityto banking institutions. This is to ensure that the approachadopted reflects the nature of risk-taking activities and thelevel of sophistication of individual institutions. Credit

exposures are weighted based on recognised external creditratings so as to provide a standardised approach to creditrisk. However, for large banking institutions with highlycomplex businesses, more advanced approaches (i.e. thefoundation or advanced internal rating based (“IRB”)approach) may be more appropriate to reflect their actualrisk profile. Similarly, there are three alternative approaches that may be adopted in allocating capital for operational risksthat is the basic indicator approach, the standardisedapproach and the advanced measurement approach. Themarket risk component retains the basic structure of the1996 Amendment to the Capital Accord to incorporatemarket risks which proposed the use of a standardisedmeasurement approach and internal models approach.

1 Enterprise Risk Management-Integrated Framework, by COSO, (Committee of Sponsoring Organizations of the Treadway Commission), (September 2004)


ENTERPRISE RISK MANAGEMENTENTERPRISE RISK MANAGEMENT

ENTERPRISE RISK MANAGEMENTAND BASEL II

It is not uncommon for banking institutions to conduct riskmanagement activities such as assessing capital requirements,data mining, limits management, and other risk managementand monitoring practices for the respective risk classeson a “silo” basis. This is largely because the skills required formanaging the various risk classes tend to be specialisedand unique in their own area. For example, in the past,experienced loan officers or credit evaluation officersnormally managed credit risk, while the treasury or financeor middle office personnel of a trading or trust divisionof a bank generally managed market risk. Each individualfunction or business unit may have its own proprietaryrisk management techniques or methods. Such practicesmake it difficult to obtain a consolidated view of risk acrossthe institution or risks types - as there are likely to beinconsistent data, analytics and assumptions across theserisk areas.

Apart from these technical challenges, there may also be alack of capabilities and expertise at the enterprise level tointegrate risk numbers and to interpret the consolidatedresult. One of the key advantages of implementing Basel II isthe useful information (especially quantitative information)that the banking institution can derive from the processof measuring its capital adequacy requirements. Thisinformation provides a better understanding about the riskcharacteristics and profile of its portfolio, the sufficiency ofrisk mitigants and the risk-return profile of its business lines.

It is also important to maintain a healthy scepticism of thequantitative measurement and to avoid over-involvement inthe intricacies and theoretical precision of risk measurementthat might lead to a loss of the big picture. Qualitativefactors such as sound judgement, knowledge and real-worldexperience are also essential to successful risk management.

The true benefit of Basel II can only be harvested when thebanking institution looks at risks and challenges at theenterprise-wide level. This may be through a dedicatedfunction that has the capabilities to interpret quantitativeresults generated by the Basel II risk management system,to proactively and continuously assess the risks exposuresand risk management of the bank, both quantitatively andqualitatively, in a consolidated manner from the enterprise-wide point of view. For this function to achieve success,banking institutions must have a comprehensive riskmanagement process (including sound governance by theboard and a senior management oversight framework) toidentify, evaluate, assess, monitor, control and mitigate allsignificant risks and to assess its overall capital adequacy.These processes should also commensurate with the sizeand complexity of the banking institution.

CONCLUSION

Our banking environment is becoming more complex,integrated and more competitive. Importantly, the keychallenge for many institutions is to create value that willenhance its competitiveness from the risk managementenhancement exercise.These developments will, in our view,mean that banking institutions must focus on having relevantsystems to facilitate the effective measurement, reportingand management of financial and non-financial risks on anenterprise-wide basis.

Risk management is a journey and not a destination. Inthis journey, Basel II is an important catalyst. We believethat a journey that incorporates the fundamentals ofERM will enhance stability in the financial system.

In many emerging economies, Basel II is seen as animportant catalyst towards the adoption of best riskmanagement practices within the banking sector in themedium to long term. Malaysia has adopted a pragmaticimplementation timeline consistent with the agenda ofits overall financial sector development programme. InMalaysia, banking institutions will adopt a two-phased BaselII implementation approach. The first phase will begin inJanuary 2008 whereby all banking institutions are to adoptthe standardised approach for credit risk and basicindicator approach for operational risk. In the secondphase which begins from January 2010, banking institutionswill be allowed to adopt the foundation IRB approach.Thefour key guiding principles for the implementation of BaselII in Malaysia are:

• to implement capacity building measures;

• to emphasise on the enhancement of the riskmanagement framework for all banking institutions;

• to emphasise on strong business justification insteadof regulatory mandate in the adoption of the moreadvanced approaches; and

• to enhance the supervisory methodology to assess theinternal models and the advanced risk management systems.

The Basel II Accord

Pillar I: Calculation of minimum capital requirements

Pillar IMinimum Capital Requirements

Pillar IISupervisory Review Process

Pillar IIIMarket Discipline

FoundationInternal

Ratings-Based

AdvancedInternal Ratings-

Based

StandardisedApproach

AdvancedMeasurement

Approach

BasicIndicatorApproach

StandardisedApproach

Market Risk Credit Risk Operational Risk

InternalModel

Approach

StandardisedMeasurement

Approach

Basel II Accord

SECTION Vl:PUBLIC AWARENESS AND EDUCATION


PUBLIC AWARENESSAND EDUCATION

10 March 2006

Our Annual Report provided detailedinformation on our performance to setplans and it was disseminated to thepublic.

Date /Ongoing Initiative Rationale

The effectiveness of a deposit insurance system is built upon public confidence and credibility.Accordingly, it is importantto us that the public understands what we do and appreciates how we contribute towards enhancing the stability of thefinancial system.

OUR INTEGRATED COMMUNICATIONS PLAN FOR 2007-2011A major milestone last year was the establishment of our Integrated Communications Plan for 2007-2011.The objectiveof this Plan is to communicate with as many stakeholders as possible.The multi-year Plan envisages both advertising andpublic relations activities. Our Plan is built upon two key underlying strategies:

• to create awareness about deposit insurance; and • to continue to build the credibility of the Corporation.

Surveys will be conducted on an ongoing basis to develop key targets to assess our performance and to ensure theeffectiveness of our strategies.

OUR INITIATIVES IN 2006The following are the highlights of our key initiatives in 2006 to raise public awareness.

This is required under the MalaysiaDeposit Insurance Corporat ion Act2005 (“MDIC Act”).

31 March 2006 Our Annual Report was forwarded to the Ministerof Finance for tabling in Parliament.

18 April 2006

Launched our website (http://www.pidm.gov.my).

This Policy guides our activities whendisseminating information and messages tostakeholders, and is made known tothe public.

It also promotes the provision of timelyand relevant information in a clear andobjective manner.


This was a preliminary survey to gaugethe level of awareness on depositinsurance. This survey also helped usto design and formulate an appropriateIntegrated Communications Plan.

April 2006

The Policy is an explicit commitmentto openness and transparency, subjectonly to the need to preserveconfidentiality in those circumstanceswhen it is appropriate to do so.

August 2006 Published our Communications Policy.

October 2006 To ensure that our public awarenessinitiatives were well-founded, focus groupswere commissioned to seek feedbackon our messages in our proposedadvertisements (to be launched in the firsthalf of 2007) and our proposed approaches.

Commissioned a series of focus groupdiscussions.

November 2006 Commissioned an independent market researchfirm to survey the awareness level.

Ongoing

This survey was to ascertain the awarenesslevel and perceptions about depositinsurance.

(Out of some 1,000 respondents surveyedusing the quantitative method, only 13%had heard of deposit insurance while4% had heard of the Corporation.)

This was to reach out to the public, andallowed us to explain about the depositinsurance system further.These placementswill continue to be our strategy in thefuture which will run alongside theadvertising campaign.

Released our Annual Report 2005.

Conducted a “dipstick” survey.

Ongoing Our toll-free hotline is dedicated toproviding quality deposit insuranceinformation to the general public in alanguage of their choice. Our Centre canrespond to queries in Bahasa Melayu,English, Chinese and Tamil.

In 2006, we commenced the followingpractices:

• monitoring the quality of responses;

• training for the Centre’s agents; and

• enhancing the efficiency of Call Centreoperations.

Our Centre is also an important channelfor feedback from the public.

This is a one-stop centre for all informationregarding deposit insurance in Malaysiaand the Corporation.We provide informationin four languages - Bahasa Melayu, English,Chinese and Tamil - to cater for our variedstakeholders.

Positioned advertisements and features innewspaper supplement on banking and finance.

Enhanced our Call Centre operations.

1800 88 1266Monday - Friday8.30am - 5.30pm


Ongoing This allowed us to work jointly with BNMon its active public information andconsumer awareness activities, which targetthe public at large via talks, seminarsand roadshows. This also allowed us toexplain our role as a financial safety netplayer within the wider context of ourfinancial system.


Ongoing

Ongoing These were carried out to expand ourreach to various constituents of ourstakeholders and also to explain our roleand responsibilities as a statutory body.

15 September 2006


Ongoing Liaison Officers are a highly importantchannel to disseminate information quicklyand effectively, as they act as a single pointof reference to the institutions that theyrepresent. They have also given us insightsand ideas on how we may effectively engagetheir institutions in the future.

Worked at cementing our relationship withmember institutions with engagements throughLiaison Officers for each member institution.

Ongoing

Ongoing This is in line with our established policy toconsult our key stakeholders and the publicto ensure our regulations and policies areeffective and understood.

Regular briefings to member institutions onspecific matters such as the computation ofpremiums and consultations prior to thedevelopment of policies and regulations.

Joint education activities with Bank NegaraMalaysia (“BNM”).

Encouraging ERM is part of our mandateto provide incentives for sound riskmanagement. This seminar also launchedPIDM’s ERM project.

Organised a seminar on enterprise risk management(“ERM”) to our member institutions, insurancecompanies and other agencies.

Regular briefings, press conferences, exclusiveinterviews, press releases and other initiatives inPeninsular and East Malaysia.

Engaged member institutions to familiarise themwith the deposit insurance system in collaborationwith Institut Bank-Bank Malaysia (“IBBM”) in aseries of briefing sessions.

This was to:

i) help achieve the acceptance and thebuy-in of member institutions;

i i) a l low us to par tner memberinstitutions in disseminating informationabout deposit insurance, as depositorsenjoy a close relationship with theirbankers and rely on them for bankinginformation; and

iii) educate and assist our members to playtheir role effectively in the system.

GOING FORWARDOur efforts to reach out to our depositors and engage stakeholders will continue.Our Integrated Communications Plan will allowus to do so in a focused manner, as well as to gauge the effectiveness of our efforts and to take corrective actions,where necessary.

• Gave a series of talks and briefings to ourstakeholders, in particular, the general publicand member institutions.

• Participated in public exhibitions and talks touniversities, businesses and chambers ofcommerce, regulatory agencies and otherparties.

• Engaged State Government officials in meetingsto brief them about the deposit insurancesystem and our role.

The media is a highly important channelof communication and partner to reachthe public in general and to convey ourkey messages.

PUBLIC AWARENESSAND EDUCATION


SECTION Vll:CALENDAR OF EVENTS

CALENDAR OF EVENTS

Audit Committee MeetingJANUARY 17

FEBRUARY 16-17

27

PIDM participated in the IADI-Asia Regional Commitee Meeting and InternationalSeminar: ‘Integrating Financial Supervision and Role of Deposit Insurers’, held at theAsian Development Bank in Manila, Philippines.

Audit Committee Meeting

APRIL 1

18

21

26

28

EONCAP Islamic Bank Berhad & Affin Islamic Bank Berhad became member institutions.

PIDM held a press conference to announce the release of Annual Report 2005.

PIDM issued a press release on the submission of information for trust accounts and jointaccounts.

PIDM conducted a briefing to Securities Commission on ‘Disclosure Requirements forTrust Accounts and Joint Accounts’ in Kuala Lumpur.

PIDM conducted a briefing to representatives from stockbroking firms, futures brokingfirms and asset management companies on guidelines on ‘Disclosure Requirements forTrust Accounts and Joint Accounts’ in Kuala Lumpur.

MARCH 1 PIDM conducted separate briefing session about thedeposit insurance system and PIDM to trainingmanagers from member institutions in Kuala Lumpur.

Board Meeting

PIDM held a press conference to launch the publicinformation campaign. In conjunction with this, PIDMwebsite (available in four languages) was launched.

Auditor General meeting and audit certification.

PIDM participated in Deposit Insurance Corporationof Japan Round Table Discussion in Tokyo, Japan.

PIDM conducted a briefing to Deutsche Bank AG,Indonesia on Islamic Banking in Kuala Lumpur.

PIDM organised a seminar: ‘Differential PremiumSystem Workshop’, presented by Ms MichèleBourque, Vice President, Insurance & RiskAssessment Division of the Canada DepositInsurance Corporation (“CDIC”).

Visit by General Director Dr Bhui Khac Son andDeputy Director Ms Pham Bao Khanh from theDeposit Insurance of Vietnam.

PIDM conducted a technical briefing on computationof annual premium to member institutions, theirrespective associations and Bank Negara Malaysia(“BNM”) in Kuala Lumpur.

8

10

13-14

16

17

17

30

Briefing

10


CALENDAR OF EVENTS

7-10

8

9

13

14

14-16

19

19

20

20

21

JUNE 4-9 PIDM participated in the 2nd Southeast Asian CentralBank Research and Training Centre (SEACEN)-IslamicResearch and Training Institute (IRTI)/IslamicDevelopment Bank (IDB) Course on Regulation andSupervision of Islamic Banks in Jakarta, Indonesia.

PIDM presented paper in the 15th InternationalBanking Congress, organised by the Central Bank ofRussian Federation in Saint Petersburg, Russia.

Remuneration Committee Meeting

PIDM, in collaboration with Institut Bank-BankMalaysia (“IBBM”), conducted a briefing on depositinsurance to member institutions in Kuala Lumpur.

Board Meeting

PIDM conducted a briefing on deposit insuranceto BNM’s Laman Informasi Nasihat dan Khidmat(“LINK”) personnel in Kuala Lumpur.

PIDM participated in the International OpenHouse organised by the Korea Deposit InsuranceCorporation (“KDIC”) in Seoul, South Korea.

PIDM signed the Strategic Alliance Agreement(“SAA”) with BNM.

PIDM issued a press release on the consultationpapers on the proposed regulations for ‘DisclosureRequirements on Trust Accounts and Joint Accounts’.

PIDM, represented by CEO Jean Pierre Sabourin,presented a briefing to Association of BanksMalaysia (“ABM”) council members.

PIDM conducted a briefing on deposit insuranceto Heads of State Government departments andagencies in Penang.

PIDM, in collaboration with IBBM and supported byBNM, conducted a briefing on deposit insurance tomember institutions in Penang.

At KDIC

SAA with BNM

MAY 1

15-18

17-18

23

30

31

AmIslamic Bank Berhad became a member institution.

PIDM participated in the 14th Executive Council Meeting of IADI in Basel, Switzerland.

PIDM participated in the 3rd Islamic Financial Services Board Summit: ‘Aligning theArchitecture of Islamic Finance to the Evolving Industry Needs’, hosted by Banque du Libanin Beirut, Lebanon.


Governance Committee Meeting

Premium received for year 2006.


CALENDAR OF EVENTS CALENDAR OF EVENTS

SEPTEMBER 2-12

6

8

11-14

12

15

16

17

19

19

25

26

Visit by Ms Patricia Griffin-Dobson, Director ofHuman Resource Management, CDIC to PIDM.

PIDM organised a press conference in conjunctionwith the 1st Anniversary of Malaysia’s DepositInsurance System in Kuala Lumpur.

PIDM, in collaboration with IBBM and supported byBNM, conducted a briefing on deposit insurance tomember institutions in Ipoh, Perak.

PIDM hosted IADI’s 15th Executive Council Meetingin Kuala Lumpur.

PIDM, in collaboration with IBBM, conducted abriefing on deposit insurance to member institutionsin Kuala Lumpur.

PIDM organised an Enterprise Risk Management(“ERM”) Seminar for deposit insurers, memberinstitutions, regulators and insurance companies inKuala Lumpur.

PIDM organised an ERM workshop for IADI membersin Kuala Lumpur.

PIDM participated in the Terry Fox Run.

Visit by Mr Ken Mylrea, Director of Corporate Risk,CDIC to share his views with PIDM on implementingERM.

Visit by Mr Gregory Zimnicki from Hong KongDeposit Protection Board (“HKDPB”) to share withPIDM his views and experience on the success inimplementing HKDPB’s payout system.

Board and Management participated in PIDM’sStrategic Planning Session.

Board Meeting

PIDM, in collaboration with IBBM and supported by BNM, conducted a briefing on depositinsurance to member institutions in Penang.

PIDM conducted a briefing on deposit insurance to members of Joint Chambers ofCommerce, Penang.

PIDM conducted a briefing on deposit insurance to students and academic staff ofUniversiti Sains Malaysia, Penang.

PIDM became the world’s first deposit insurer to be included as an Associate Member ofthe Islamic Financial Services Board (IFSB).


With IADI guests

22

24-25

23

24

24

28

29

Press Conference

14

19

21

23

26-30

27 JUL-4 AUG

JULY 12 PIDM, in collaboration with IBBM, conducted abriefing on deposit insurance to member institutionsin Kuala Lumpur.

PIDM conducted a briefing on deposit insurance to PIDMLiaison Officers of member institutions in Kuala Lumpur.

Al Rajhi Banking & Investment Corporation (Malaysia)Bhd became a member institution.

PIDM, in collaboration with IBBM and supported byBNM, conducted a briefing on deposit insurance tomember institutions in Johor Bahru, Johor.

PIDM participated in BNM’s public awarenessroadshow in Kuantan, Pahang.

PIDM participated in the annual ‘Karnival Pengguna2006’, organised by the Ministry of Domestic Tradeand Consumer Affairs in Kuala Lumpur.

PIDM organised a study visit to CDIC and theOffice of the Superintendent of Financial Institutionsin Canada.

Karnival Pengguna

AUGUST 5

8

11

12

13

15

16

18

PIDM participated in BNM’s public awarenessroadshow in UiTM Segamat, Johor.

PIDM, in collaboration with IBBM, conducted abriefing on deposit insurance to member institutionsin Kuala Lumpur.

PIDM conducted a briefing on deposit insuranceto students and academic staff of the IslamicInternational Universiti, Malaysia.

PIDM participated in BNM’s public awarenessroadshow in Labuan.

PIDM participated in BNM’s public awarenessroadshow in Universiti Malaysia Sabah, Labuan campus.


PIDM, in collaboration with IBBM and supported byBNM, conducted a briefing on deposit insurance tomember institutions in Kota Bharu, Kelantan.

PIDM, in collaboration with IBBM and supported byBNM, conducted a briefing on deposit insurance tomember institutions in Kuantan, Pahang.

Briefing

PIDM, in collaboration with IBBM and supported by BNM, conducted a briefing on depositinsurance to member institutions in Alor Star, Kedah.

PIDM participated in BNM’s public awareness roadshow in Miri, Sarawak.

Briefing


DECEMBER 4

4

4

5

5

6

7

8

Board Meeting

Board approved Corporate Plan 2007-2009 andFinancial Plan 2007.

PIDM issued a press release on the publishing of itsgovernance policies and by-laws to the public.

PIDM, in collaboration with IBBM and supported byBNM, conducted a briefing on deposit insurance tomember institutions in Kuching, Sarawak.

PIDM conducted a media briefing on depositinsurance to local press in Sarawak.

PIDM conducted a media briefing on depositinsurance to local press in Sabah.

PIDM, in collaboration with IBBM and supported byBNM, conducted a briefing on deposit insurance tomember institutions in Kota Kinabalu, Sabah.

PIDM, in collaboration with IBBM, conducted acombined briefing session to member institutions andHeads of Government departments and agenciesof Labuan.

CALENDAR OF EVENTS CALENDAR OF EVENTS

NOVEMBER 1

6

7-11

9

13-17

17-19

22

29

29-30

Southern Bank Berhad merged with CIMB BankBerhad effective 1st November 2006. PIDMcontinues to separately cover eligible deposits inboth institutions for two years.Thereafter, PIDM willcover eligible deposits in the single, merged entity.


Remuneration Committee Meeting

Meeting with KDIC to share knowledge oncommunications matters. PIDM participated in theCitigroup-INSEAD Financial Education Summit2006 in Seoul.

PIDM participated in IADI’s 5th Annual GeneralMeeting and Annual Conference held in Rio deJaneiro, Brazil.

PIDM participated in Financial Exposition 2006organised by Financial Planning Association Malaysia(“FPAM”) in Kuala Lumpur.


PIDM, represented by CEO Jean Pierre Sabourin,presented a paper in the 26th Southeast Asia-NewZealand-Australia (SEANZA) Central BankingCourse.

Audit Committee Meeting (via teleconference)

PIDM participated in the 2nd APEC Policy Workshopon “Financial Sector Reform: Maintaining FinancialStability through Financial Safety Nets” held inLombok, Indonesia.

FPAM Exhibition

In Rio de Janeiro

OCTOBER 3-15

5

9

11

PIDM participated in the IADI-Federal Reserve ofChicago Conference in Chicago and conducteda study visit to Federal Deposit InsuranceCorporation and Office of the Comptroller of theCurrency in Washington DC.

PIDM conducted a briefing on deposit insuranceto academic sta f f and students of Ni la iInternational College.

PIDM conducted a briefing on deposit insurance toCommercial Crime Investigation Department ofthe Royal Malaysian Police (Jabatan Siasatan JenayahKomersil Polis Diraja Malaysia) in Kuala Lumpur.

Majlis Berbuka Puasa (breaking fast) with the Pressin Kuala Lumpur.

Conference

24

Strategic Alliance Agreement With BNM

APPENDIX

List of Member Institutions

Charter of Governance Committee

Charter of Remuneration Committee

Charter of Audit Committee

Board Governance Policy

Position Description: Members of the Board of Directors

Position Description: Chairperson

Position Description: Chief Executive Officer

Corporate By-Laws

Policy for Disclosure of Information Concerning Wrongdoing in the Workplace

Corporate Scorecard

Glossary of Terms

Frequently Asked Questions

Contact Details

137 138Perbadanan Insurans Deposit Malaysia 137 138Perbadanan Insurans Deposit Malaysia

CHARTER OF GOVERNANCE COMMITTEE

LIST OF MEMBER INSTITUTIONSAS AT 31 DECEMBER 2006

A. MANDATE

Pursuant to Section 7 of the Malaysia Deposit InsuranceCorporation Act 2005, the Corporation may establish anycommittee as it considers necessary or expedient for theperformance of its functions.The Board has considered itnecessary to establish a Governance Committee.

B. OBJECTIVE

The Governance Committee (Committee) of the Board ofDirectors (the Board) of the Malaysia Deposit InsuranceCorporation (Corporation) is responsible to directimplementation of sound corporate governance principles inthe Corporation. In this regard, the principal objectives of theCommittee are to assist with Board oversight of: developingeffective corporate governance principles and practices;evaluating and assessing the functioning of the Board, BoardCommittees and Management; nominating individualsqualified to become Directors consistent with criteriaapproved by the Corporation; and succession planning.

C. OPERATING PRINCIPLES

1. FUNCTIONS AND COMPOSITION

a) The Committee shall comprise three members ofthe Board, as named by the Board.

b) Members of the Committee shall each beindependent of Management.

c) The Committee shall carry out such functions asare assigned or delegated to it by the Board andany incidental activities consistent with thisCharter as the Committee or the Board deemsnecessary or appropriate.

2. CHAIR

The Committee shall be chaired by the Chairman ofthe Board.

3. QUORUM

The presence of two members constitutes a quorumfor a meeting of the Committee.

4. VOTING

A matter put to a vote at a meeting of the Committeeshall be decided by a majority of the votes cast, and in the event of an equality of votes its Chair has asecond vote.

5. PROCEDURE AND CONDUCT

Subject to this Charter and any resolution of theBoard respecting a specific matter, the Chair shalldetermine the procedures and conduct of meetings ofthe Committee.

6. SECRETARY AND MINUTES

The Corporate Secretary shall be the secretary of theCommittee. Copies of the minutes of the proceedingsof the Committee shall be sent by the CorporateSecretary to all Members of the Board once they havebeen approved by the Committee.

7. FREQUENCY OF MEETINGS

The Committee will meet at the discretion of its Chair,but not less frequently than twice each year.

8. NOTICE OF MEETINGS

The proper notice period for calling a meeting of theCommittee shall be a minimum of 14 days or suchshorter notice as agreed by the Committee.

9. MEETING AGENDA

A written agenda for each meeting of the Committeewill be distributed to the members of the Committee atleast five days in advance of the meeting date, togetherwith any related materials, if available.

COMMERCIAL BANKS1. ABN AMRO Bank Berhad2. Affin Bank Berhad 3. Alliance Bank Malaysia Berhad *4. AmBank (M) Berhad 5. Bangkok Bank Berhad6. Bank of America Malaysia Berhad7. Bank of China (Malaysia) Berhad8. Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad9. CIMB Bank Berhad (formerly known as Bumiputra-Commerce Bank Berhad)10. Citibank Berhad *11. Deutsche Bank (Malaysia) Berhad 12. EON Bank Berhad 13. Hong Leong Bank Berhad14. HSBC Bank Malaysia Berhad *15. J.P. Morgan Chase Bank Berhad 16. Malayan Banking Berhad *17. OCBC Bank (Malaysia) Berhad *18. Public Bank Berhad *19. RHB Bank Berhad20. Standard Chartered Bank Malaysia Berhad *21. The Bank of Nova Scotia Berhad22. United Overseas Bank (Malaysia) Berhad

ISLAMIC BANKS1. Affin Islamic Bank Berhad2. AmIslamic Bank Berhad3. Bank Islam Malaysia Berhad4. Bank Muamalat Malaysia Berhad5. CIMB Islamic Bank Berhad (formerly known as Commerce Tijari Bank Berhad)6. EONCAP Islamic Bank Berhad7. Hong Leong Islamic Bank Berhad8. Kuwait Finance House (M) Berhad9. RHB Islamic Bank Berhad10. Al Rajhi Banking & Investment Corporation (Malaysia) Berhad

* denotes these institutions provide Islamic Windows.




2. EVALUATION OF BOARD OPERATIONSAND BOARD COMMITTEES

a) In consultation with the Chief Executive Officer(CEO), assess the needs of the Board in terms of thefrequency and location of Board and committeemeetings, meeting agendas, documents andinformation, and the conduct of meetings, and makerecommendations to the Board as required.

b) Develop, recommend and annually review, forBoard approval, the mandates and responsibilitiesof the Board, the Chairman of the Board, the CEO,a member of the Board and the Board Committees.

c) Develop a process to assist the Board indetermining whether the Board is satisfied withthe manner, frequency and timeliness with whichsignificant issues are brought to its attention, aswell as the appropriateness of that information.

d) Recommend to the Board, and annually implement,a method for regularly evaluating and assessing theeffectiveness of the Board and of individual membersof the Board and Board committees and recommendany appropriate changes arising therefrom.

3. BOARD NOMINATIONS

a) Develop, recommend and annually review both aBoard profile and a Board member profile ofqualifications and skills and characteristics forindividual directors so as to effectively fulfil theBoard’s responsibilities that take into considerationthe current strengths, skills and experience on theBoard, terms, retirement dates and the strategicdirection of the Corporation.

b) Identify a list of potential Board nominees who fitthe profiles and update such list on a regular basis.

c) When a vacancy or vacancies on the Board occurs,consider the most recently recommended profilesand update them if required, and prepare andrecommend to the Board a list of nominees to fillsuch vacancy or vacancies to enable the Board tomake a recommendation to the Minister.

d) Develop and implement a strategy to communicatethe profiles and potential candidates to the Minister.

e) Review periodically the compensation program ofthe members of the Board and make anyrecommendation to the Board.

f) Review, monitor and make recommendationsregarding the orientation, training and ongoingdevelopment of members of the Board.

4. SUCCESSION PLANNING

Review Management’s succession plans for the CEOand other corporate officers approved by the Boardand make recommendations in respect of the same, ifany, to the Board for approval; and

5. REPORTING AND DISCLOSURE

Recommend to the Board that any reports ongovernance that may be required or consideredadvisable for public disclosure be produced.

10. SUPPLEMENTAL ATTENDEES

Any person who may possess information that wouldbe useful to the Committee in carrying out its dutiesmay be invited by the Chair to attend any meeting ofthe Committee.

11. TERM OF APPOINTMENT/ROTATION OFMEMBERS

Members of the Committee should be changed onan appropriate, regular basis. Such change should beon a rotation basis in order to ensure that the entireCommittee is not changed at any one time.

12. REPORTING

The Committee will, where appropriate, providewritten or verbal report of each meeting of theCommittee at the next regular Board meeting or asmay otherwise be required by the Board.

13. REVIEW OF CHARTER

The Committee shall review and assess theadequacy of this Charter at least annually. If theCommittee recommends any amendments, theCommittee shall submit a revised Charter to theBoard for its approval.

14. SELF-ASSESSMENT

An evaluation of the Committee shall be conductedregularly, in which the Committee shall review itsperformance for the purpose, among other things,of assessing whether the Committee fulfilled theresponsibilities and duties stated in this Charter.

15. DISCLOSURE

The Committee shall ensure that this Charter and itscomposition are publicly disclosed.

16. INDEPENDENT COUNSEL OR OTHERADVISORS

The Committee has the authority to engage outsideadvisors, including but not limited to counsel,independent consultants and/or other experts, asneeded, to review any matter under its responsibility, inaccordance with the relevant Board resolution or policy.

D. PRINCIPAL DUTIES ANDRESPONSIBILITIES

1. CORPORATE GOVERNANCE OVERSIGHT

a) The Committee shall review at least annually theCorporation’s approach to governance issues andshall make recommendations to the Board respectingrevisions to the Corporation’s governance guidelines.The Committee shall make recommendations to theBoard on policies with regard to director tenureretirement and succession.

b) Ensure there is a system that enables a Boardcommittee or member of the Board to engageseparate independent counsel or other advisors inappropriate circumstances, at the Corporation’sexpense, and be responsible for the ongoingadministration of such a system.

c) On a periodic basis, review the Corporation’smandate as set out in the Malaysia Deposit InsuranceCorporation Act 2005 and make any recommendationit sees fit to the Board.

d) Keep up to date on corporate governancedevelopments so as to ensure the Corporation’sgovernance practices are in line with best practices.

e) Undertake such other governance initiatives asmay be necessary or desirable to ensure that theappropriate processes, structures and informationnecessary for effective direction and oversight arein place to contribute to the sound governanceand management of the Corporation.


CHARTER OF REMUNERATION COMMITTEE

CHARTER OF REMUNERATION COMMITTEE

A. MANDATE

Pursuant to Section 7 of the Malaysia Deposit InsuranceCorporation Act 2005, the Corporation may establish anycommittee as it considers necessary or expedient for theperformance of its functions.The Board has considered itnecessary to establish a Remuneration Committee.

B. OBJECTIVE

The objective of the Remuneration Committee(Committee) of the Board of Directors (the Board) of theMalaysia Deposit Insurance Corporation (Corporation) isto ensure that the Corporation has fair, equitable humanresource policies that profiles for the hiring and retentionof people with the appropriate expertise andqualifications. In this regard, the principal objectives of theCommittee are to assist with Board oversight of: humanresource and compensation matters; managementsuccession plans generally; the review and approval ofannual objectives for the Chief Executive Officer (CEO)and perform the annual evaluation thereof; and policiesand processes relating to employee business conduct andethical behaviour.


1. FUNCTIONS AND COMPOSITION

a) The Committee shall comprise three members ofthe Board, as named by the Board.

b) Members of the Committee shall each be independentof Management.

c) The Committee shall carry out such functions asare assigned or delegated to it by the Board andany incidental activities consistent with thisCharter as the Committee or the Board deemsnecessary or appropriate.

2. CHAIR

The Committee shall be chaired by one of its members,as named by the Board.

3. QUORUM


4. VOTING

A matter put to a vote at a meeting of the Committeeshall be decided by a majority of the votes cast, and inthe event of an equality of votes its Chair has asecond vote.


Subject to this Charter and any resolution of the Boardrespecting a specific matter, the Chair shall determine theprocedures and conduct of meetings of the Committee.


The Corporate Secretary shall be the secretary of theCommittee. Copies of the minutes of the proceedingsof the Committee shall be sent by the CorporateSecretary to all Members of the Board once they havebeen approved by the Committee.

7. FREQUENCY OF MEETINGS

The Committee will meet at the discretion of its Chair,but not less frequently than twice each year.



9. MEETING AGENDA

A written agenda for each meeting of the Committeewill be distributed to the members of the Committeeat least five days in advance of the meeting date,together with any related materials, if available.



11. TERM OF APPOINTMENT/ROTATION OFMEMBERS

Members of the Committee should be changed onan appropriate, regular basis. Such change should beon a rotation basis in order to ensure that the entireCommittee is not changed at any one time.

12. REPORTING

The Committee will, where appropriate, provide writtenor verbal report of each meeting of the Committee atthe next regular Board meeting or as may otherwisebe required by the Board.


The Committee shall review and assess the adequacyof this Charter at least annually. If the Committeerecommends any amendments, the Committee shallsubmit a revised Charter to the Board for its approval.

14. SELF-ASSESSMENT

An evaluation of the Committee shall be conductedregularly, in which the Committee shall review itsperformance for the purpose, among other things,of assessing whether the Committee fulfilled theresponsibilities and duties stated in this Charter.

15. DISCLOSURE

The Committee shall ensure that this Charter and itscomposition are publicly disclosed.


The Committee has the authority to engage outsideadvisors, including but not limited to counsel,independent consultants and/or other experts, asneeded, to review any matter under its responsibility, inaccordance with the relevant Board resolution or policy.


1. POLICIES AND STRATEGIES

a) The Committee shall review key human resourcepolicies and strategies and propose such changesas seem desirable.

b) The Committee shall review the Corporation’scompensation philosophy and its related policies,and make recommendations, if any, to the Boardfor approval.

c) The Committee shall ensure that the Corporationhas ongoing, appropriate and effective policies andprocedures with respect to employee businessconduct and ethical behaviour and shall reviewpolicies and codes in respect of same and makerecommendations, if any, to the Board for approval.

2. COMPLIANCE AND REPORTS

The Committee shall review reports with respect to:

a) compliance with legal requirements and majorcorporate policies pertaining to human resourcematters on an annual basis; and

b) compliance with policies on employee businessconduct and ethical behaviour on an annual basis orimmediately where circumstances dictate. Whenrequired, the Committee shall request ofManagement that it provide a report to the AuditCommittee in the event a breach occurs or aconcern is raised that is of a nature that warrantssuch a report.


CHARTER OF REMUNERATION COMMITTEE CHARTER OF AUDIT COMMITTEE

3. MATTERS REFERRED BY CEO

The Committee shall review any matter concerninghuman resource and compensation matters that may bereferred to it by the CEO.

4. REPORTS TO BOARD

The Committee shall report to the Board as it deemsappropriate regarding human resource and compensationmatters and Management performance in this area.

5. BONUS AWARDS

The Committee shall review and approve individualemployee bonus awards as recommended by the CEO.

6. CEO OBJECTIVES AND EVALUATION

The Committee shall:

a) review the annual statement of objectives for the CEOand recommend same to the Board for approval; and

b) review the performance of the CEO based on anevaluation thereof by the Chairman of the Board,having regard to the aforesaid statement of objectivesand any other relevant factors.The Committee shallmake recommendations, if any, to the Board withrespect to the CEO’s compensation and bonus.

7. COMPLAINTS

Save and except as expressly provided in any otherBoard Charter or policy, the Committee shall serve asthe initial point of contact at the Board level for anycomplaints concerning the CEO that may reach theBoard, on the understanding that the normal resolutionmechanisms must be followed and complaints wouldonly be brought forward when every other appealprocess had been exhausted.

A. MANDATE

Pursuant to Section 7 of the Malaysia Deposit InsuranceCorporation Act 2005, the Corporation may establish anycommittee as it considers necessary or expedient for theperformance of its functions.The Board has considered itnecessary to establish an Audit Committee.

B. OBJECTIVE

The purpose of the Audit Committee (Committee) of theBoard of Directors (the Board) of the Malaysia DepositInsurance Corporation (Corporation) is to ensure that theauditing, accounting principles and practices are in line withinternational and Malaysian best practices and conform toall legislative requirements. In this regard, the principalobjectives of the Committee are to assist the Board withoversight of: the integrity of the Corporation’s financialstatements; the financial reporting process; the systems ofinternal accounting and financial controls; the performanceof the Corporation’s internal audit function; the identificationand management of the Corporation’s significant risks; andthe Corporation’s compliance with ethics-related policies,and legal and regulatory requirements.


1. (a) FUNCTIONS AND COMPOSITION

The Committee shall comprise three members of theBoard of Directors, as named by the Board. Committeemembers shall each be independent of Management.The Committee will carry out such functions as areassigned or delegated to it by the Board.

(b) COMPETENCIES

All Committee members appointed to the Committeeshall either:

i) be financially literate, upon appointment, thatis, having a basic understanding of finance andaccounting and being able to read andunderstand fundamental financial statements,including a balance sheet, income statementand statement of cash flows; or

ii) undertake to be financially literate within areasonable period of time after their appointmentto the Committee.

Subject to availability, at least one member ofthe Committee shall have financial expertise.“Financial expertise” means a person who hasthe following attributes: a background inaccounting or related financial managementexperience which would include any experienceor background which results in the individual’sfinancial sophistication, including being or havingbeen an auditor, a chief executive officer, chieffinancial officer, or other senior officer withfinancial oversight responsibilities.

Where appropriate, Committee members willenhance their familiarity with financial andaccounting practices for Audit Committees andother areas relevant to their responsibilities bykeeping abreast of trends and best practices inthese areas including considering topical issuesand their application to the Corporation and byparticipating in educational sessions or otheropportunities for development.

2. CHAIR

The Chair is a non ex-officio Director having financialexpertise, as named by the Board.

3. QUORUM


4. VOTING

A matter put to a vote at a meeting of the Committeeshall be decided by a majority of the votes cast and inthe event of an equality of votes its Chair has asecond vote.

CHARTER OF AUDIT COMMITTEE


Subject to any resolution of the Board in respect of aspecific matter, the Chair shall determine the procedureat and conduct of meetings of the Committee.


The Corporate Secretary shall be the secretary of theCommittee. Copies of the minutes shall be sent bythe Corporate Secretary to all Members of the Boardonce they have been approved by the Committee.

7. FREQUENCY AND CALLING OF MEETINGS

The Committee will meet at the discretion of theChair of the Committee, but not less frequently thanfour times each year.



9. AUDITOR GENERAL (AG)

The Auditor General, as referred to in the Audit Act1957 (Revised 1972) (Act 62), is:

i) entitled to receive notice of every meetingof the Committee and, at the expense ofthe Corporation, to attend and be heard ateach meeting, and the AG shall be invitedto attend any or every meeting of theCommittee; and

ii) may call a meeting of the Committee.

10. PRIVATE MEETINGS

The Committee may meet privately as a committee,and periodically with Management, the AG and thehead of the internal audit function in separateprivate sessions.

11. MEETING AGENDA

A written agenda for each meeting of the Committeewill be distributed to the members of the Committee atleast five days in advance of the meeting date, togetherwith any related materials, if available.



13. TERM OF APPOINTMENT/ROTATION OFCOMMITTEE MEMBERS

Members of the Committee shall be changed on anappropriate, regular basis. Such change should be ona rotation basis in order to ensure that the entireCommittee is not changed at any one time.

14. REPORTING

The Committee will, where appropriate, providewritten or a verbal report of each meeting of theCommittee at the next regular Board meeting or asmay otherwise be required by the Board.


The Committee shall review and assess theadequacy of this charter at least annually. If theCommittee considers amendments are necessary,the Committee shall recommend such amendmentsto the Board for its approval.

16. SELF-ASSESSMENT

An evaluation of the Committee shall be conductedregularly, in which the Committee shall review itsperformance for the purpose, among other things, ofassessing whether the Committee fulfilled theresponsibilities and duties stated in this Charter.


CHARTER OF AUDIT COMMITTEE

17. DISCLOSURE

The Committee shall ensure that this Charter and thecomposition of the Committee are publicly disclosed.


The Committee has the authority to engageoutside advisors, including but not limited tocounsel, independent audit consultants and/orother experts, as needed, to review any matterunder its responsibility, in accordance with therelevant Board resolution or policy.


1. ADVICE AND RECOMMENDATIONS TOBOARD

In discharging its duties and responsibilities, theCommittee relies on the expertise of Management,the Corporation’s internal audit function and theAG. Although it does not carry out internal audits,the Committee shall monitor the audit and reviewthe reports, and make reasonable inquiries, to allowit to provide sound advice and recommendations tothe Board.

2. INVESTIGATION

In assisting the Board in discharging its oversight role,the Committee is empowered to investigate any matterbrought to its attention with full access to all books,records, facilities, AG and personnel of the Corporation.The Committee shall recommend to the Board thatspecial investigations be conducted into such mattersas the Committee may deem appropriate based oninformation supplied to it.

3. FINANCIAL REPORTING

The Committee shall assist the Board in discharging itsoversight role of reliable, accurate and clear financialreporting, including by reviewing the Corporation’sannual financial statements and Management’s

discussion and analysis (MD&A) prior to approval bythe Board, and reviewing, as appropriate, releases to thepublic of significant non-public financial information.Such review shall include, where appropriate but at leastannually, discussion with Management, the internal auditfunction, and the AG, of significant issues regardingaccounting principles, the Corporation’s accountingpolicies, and significant management estimates andjudgments, including the quality and acceptability ofgenerally accepted accounting principles (GAAP).

The Committee shall satisfy itself that adequateprocedures are in place for the review of theCorporation’s public disclosure of financial informationextracted or derived from the Corporation’s financialstatements, other than the public disclosure in theCorporation’s annual financial statements and MD&A, andmust periodically assess the adequacy of those procedures.

4. FINANCIAL REPORTING PROCESSES,ACCOUNTING POLICIES AND INTERNALCONTROL STRUCTURE

Management is responsible for the preparation,presentation, and integrity of the Corporation’s financialstatements and for maintaining appropriate accountingand financial reporting principles and policies andinternal controls and procedures designed to ensurecompliance with accounting standards and applicablelaws and regulations.

The Committee shall seek Management’s and the AG’sviews on opportunities to improve the quality of theCorporation’s accounting principles as applied in itsfinancial reporting, inquire into alternative treatmentsthat may have been considered but rejected, review theaggressiveness or conservatism of the Corporation’saccounting principles and estimates, and reviewinstances where the AG’s advice on accounting ordisclosure matters has not been followed.

Specifically, the Committee shall assist the Board in itsoversight of the financial reporting process of theCorporation including:

a) reviewing and advising the Board with respect to theCorporation’s annual financial statements;

b) reviewing and advising the Board with respect to theAG’s annual audit report;


CHARTER OF AUDIT COMMITTEE CHARTER OF AUDIT COMMITTEE

c) reviewing major changes to the Corporation’sauditing and accounting principles and practices assuggested by the AG, the internal audit functionor Management;

d) reviewing the integrity of the Corporation’sfinancial reporting processes and the internalcontrol structure;

e) ensuring that Management has the necessary policiesand procedures in place related to internal controls,in accordance with applicable laws, regulations andguidance, to provide reasonable assurance on theadequacy and effectiveness of the Corporation’sinternal control systems; and reviewing the relatedreporting by Management and the internal auditfunction on such internal controls;

f ) reviewing the process relating to and thecertifications of the Chief Executive Officer (CEO)and the Chief Financial Officer on the integrity ofthe Corporation’s financial statements;

g) reviewing the plan for the annual audit by assessingthe reasonableness of the audit scope and plan anddetermining whether the Corporation is receivingappropriate audit coverage and overall effort;satisfying itself that the AG has considered the workof the internal audit function in developing its overallaudit strategy; and, assessing the degree of assurancethat the Board will be able to take from the AG’swork. Accordingly, the Committee should satisfyitself that the audit scope will not be restricted in anyway and that key areas of interest to the Board areadequately covered;

h) reviewing and monitoring the implementation ofrecommendations made through the annual audit bythe AG and any management letter provided by theAG and Management’s responses to such reportsand any such letter;

i) establishing systems of reporting to the Committeeby each of Management, the AG and the internal auditfunction regarding any significant judgements made inManagement’s preparation of the financial statementsand any significant difficulties encountered duringthe course of the review or audit, including anyrestrictions on the scope of work or access torequired information;

j) through its oversight of the internal audit function,satisfying itself that the Corporation is maintaining itsbooks of account, records in relation thereto, financialand management control and information systemsand management practices in such manner as willprovide reasonable assurance that:

i) the assets of the Corporation are safeguardedand controlled;

ii) the transactions of the Corporation are inaccordance with the requirements of the Statutory Bodies (Accounts and AnnualReports) Act 1980 (Act 240), other legislativerequirements, directives, circulars or guidelinesissued by the Ministry of Finance or the PrimeMinister’s Department; and

iii) the financial, human and physical resources ofthe Corporation are managed economicallyand efficiently and the operations of theCorporation are carried out effectively.

5. FINANCIAL MANAGEMENT OVERSIGHT:

a) Operating and Capital Budgets – monitor and advisethe Board with respect to the annual operatingbudget and capital plan.

b) Financing – review and advise the Board withrespect to the policies and procedures of theCorporation relating to and the terms andconditions of any external financing to be incurredor assumed by the Corporation, through theCorporation’s debt or otherwise.

c) Investments – review and advise the Board with respect to the policies and procedures ofthe Corporation relating to and the terms and conditions of the investment of theCorporation’s cash assets in short-term and long-term securities.

d) Chairman’s and Officers’ Expenses – receive reportsfrom Management, and review reports thereonfrom the internal audit function and/or AG on theirreview of the expense accounts of the Chairman ofthe Board and Officers of the Corporation.

6. THE INTERNAL AUDIT FUNCTION

The internal audit function investigates and providesinformation and assurance to the Committee andManagement on the Corporation’s books of accountand records and on the effectiveness and performanceof financial and management control and informationsystems and management practices and that theoperations of the Corporation are carried outeffectively pursuant to the relevant legislation.

In order to fulfil its responsibilities, the internal auditfunction requires independent status and therefore,functionally reports directly to the Committee and,administratively reports to the CEO. This relationshiprequires that the Committee and the internal auditfunction have unrestricted access to each other directly.

The Audit Committee is responsible for the oversightof the work of the internal audit function and for thecompensation and oversight of the Chief InternalAuditor. The Chair of the Committee shall beconsulted before the appointment of the ChiefInternal Auditor and shall conduct entry and exitinterviews with the same.

The Committee shall oversee any internal audit of the Corporation. The Committee’s specificresponsibilities include:

a) reviewing the internal audit function’s mandate on anannual basis;

b) assessing the internal audit function’s capabilities;

c) reviewing the internal audit function’s independenceand reporting relationships;

d) reviewing the internal audit function’s audit plans,budgets, quality and quantity of staff and otherresources it needs to do its job well;

e) reviewing the internal audit function’s performanceincluding performance against its audit plans andbudgets;

f ) reviewing the internal audit function’s reports;

g) monitoring the implementation of the internal auditfunction’s reports and recommendations;

h) ensuring coordination of the internal audit functionwith annual AG audits and special examinations; and

i) reviewing the overall operations of the internalaudit function having regard to its mandate andtaking into account current internal audit standards.

7. RISK MANAGEMENT


a) ensure that sound policies, procedures and practicesare implemented for the management of keycorporate risks;

b) receive sufficient information to understand thenature and magnitude of significant risks to which theCorporation is exposed;

c) review with Management and advise the Board on the Corporation’s policies developed andimplemented to manage the Corporation’s riskexposures, and review such policies at least oncea year to ensure that they remain appropriate and prudent;

d) on a regular basis, obtain reasonable assurance thatthe Corporation’s risk management policies forsignificant risks are being adhered to;

e) report to the Board on: the significant risks; thepolicies and controls in place to manage thesesignificant risks; and the overall effectiveness ofthe risk management process;

f ) periodically consider the respective roles of the AGand internal audit function concerning risk managementat the Corporation and annually evaluate the AG’sand internal audit function’s respective performancein relation to such roles; and

g) request reports from the internal audit functionvalidating Management’s risk assessments.


1 A list of references can be found at the end of the Policy

BOARD GOVERNANCE POLICYCHARTER OF AUDIT COMMITTEE

8. ETHICAL AND LEGAL COMPLIANCE


a) review with the Corporation’s counsel any legalmatter that could have a significant impact on theCorporation’s financial statements;

b) ensure oversight for ethics and integrity andpreservation of the Corporation’s reputation byreceiving from Management, reports on compliancewith the Corporation’s policies or codes of businessconduct and ethical behaviour and any other matterof conduct or behaviour that may give rise to aliability to the Corporation; and by reviewing anyreport that is received from the internal auditfunction, the AG and/or other Committee Chairs ontheir review of compliance with same;

c) ensure there is a system for monitoring theCorporat ion ’s compl iance with laws andregulations, and obtain reports, on an annual basis,that the Corporation is in conformity with applicablelegal requirements;

d) review the results of Management’s investigationof, and actions taken in connection with, anyinternal control or accounting matters that may be questionable;

e) establish a process for (i) the receipt, retentionand treatment of complaints or concerns regardingaccounting, internal controls or auditing matters;(ii) the confidential and anonymous submission,in accordance with established corporate policies,by the Corporation’s employees of concernsregarding questionable accounting or auditingmatters and (iii) the receipt, retention andtreatment of complaints regarding the CEO andsenior officers of the Corporation. Establish aprocess for the evaluation, investigation andresolution of concerns relating to accounting,internal controls or auditing matters that may bequestionable; and

f ) investigate any allegations that any officer or directorof the Corporation, or any other person acting underthe direction of such a person, took any action toinfluence, coerce, manipulate or mislead any personengaged in the performance of an audit of thefinancial statements of the Corporation for thepurpose of rendering such financial statementsmaterially misleading and, if such allegations proveto be correct, take or recommend to the Boardappropriate disciplinary action.

A. INTRODUCTION

1. Sound governance is important, if an organisation is toachieve its objectives and maintain its reputation.Effective performance by the board - boardgovernance - helps ensure that objectives are realised,resources are well managed, important relationshipsare nurtured, and the interests of stakeholders arereflected in decisions. Governance regimes areunlikely to be effective where there is lack of clarityor understanding of the roles of the respectiveparticipants in an organisation.

2. Accordingly, the Board of Directors (the “Board”) of the Malaysia Deposit Insurance Corporation (the“Corporation”) wishes to record its understanding of its roles and responsibilities, and the principles andstandards which will guide the Board in carrying out itsroles and responsibilities.

3. This policy reflects:

a) the legislation to which the Corporation is subject, and

b) the Board’s determination that the Corporationshould follow sound standards of business andfinancial practices, adapted where relevant topublic sector organisations.

4. This policy sets out of 15 best practices or standardsof behaviour to which the Board will subscribe incarrying out its responsibilities. These best practicesand standards have been developed by reference torecognised best practices and corporate governanceprinciples generally, adapted where appropriate, toreflect the fact that the Corporation is a statutorybody with public policy objectives1.

5. In particular, this policy and its set of standards havebeen developed based on overarching principles ofgovernance adopted by the Corporation, in line withrecommendations set out in an international study,the ‘Governance in the Public Sector: A GoverningBody Perspective’, by the International Federation ofAccountants (August 2001) (the ‘IFAC Study’). Theseare as follows:

• Openness – “…to ensure that stakeholders can haveconfidence in the decision-making processes and

actions of public sector entities, in the managementof their activities, and in the individuals with inthem. Being open through meaningful consultationwith stakeholders and communication in full,accurate and clear information leads to effective andtimely action and stands up to necessary scrutiny.”

• Integrity – “…comprises both straightforwarddealing and completeness. It is based upon honestyand objectivity, and high standards of propriety andprobity in the stewardship of public funds andresources, and management of an entity’s affairs. Itis dependent on the effectiveness of the controlframework and on the personal standards andprofessionalism of the individuals within the entity.It is reflected both in the entity’s decision-makingprocedures and in the quality of its financialperformance reporting.”

• Accountability – “…is the process whereby thepublic sector entities, and individuals within them, areresponsible for their decisions and actions, includingtheir stewardship of public funds and all aspects ofperformance, and submit themselves to appropriateexternal scrutiny. It is achieved by all parties having a clear understanding of those responsibilities, andhaving clearly defined roles through a robuststructure. In effect, accountability is the obligation toanswer for a responsibility conferred.”

6. The set of standards to which the Board subscribes areaccompanied by explanations and reference to sourcesand by indications of some of the Board’s expectationsof Management, which do not form part of the policyand which are not intended to be exhaustive.

B. BACKGROUND

1. THE CORPORATION’S OBJECTS

1.1 The Corporation was established under the MalaysiaDeposit Insurance Corporation Act 2005 (the ‘Act’).The Act sets out the Corporation’s objects, confersvarious powers on the Corporation and its Boardrespectively, sets out the terms of deposit insurance,and deals with other aspects of the Corporation’soperations.


2 A legal opinion has been obtained on this matter.

3 Section 17 of the Act imposes a duty on a director of the Board to act at all times in the best interest of the Corporation.A director should be honest and use reasonablediligence in discharge of the duties of his office. A director or any person who has been a director is prohibited to make improper use of any information acquired byvirtue of his position as a director to gain, directly and indirectly, an advantage for himself or for any other person or do, say or publish anything that may be detrimentalto the interests of the Corporation.

BOARD GOVERNANCE POLICY BOARD GOVERNANCE POLICY

Under Section 4 of the Act, the Corporation’s objectsare to:

a) administer the deposit insurance system under the Act;

b) provide insurance against the loss of part or all ofthe deposits of a member institution;

c) provide incentives for sound risk management in thefinancial system; and

d) promote and contribute to the stability of thefinancial system in Malaysia.

1.2 In achieving its objects under paragraphs 1.1(b) and(d), the Corporation is required to act in such manneras to minimise costs to the financial system.

2. DIVISION OF RESPONSIBILITIES ANDACCOUNTABILITY

2.1 The Corporation is accountable to Parliament throughthe Minister of Finance2.

2.2 Under section 11 of the Act, the Board is responsiblefor the conduct of the business and affairs of theCorporation3. The Board is made up of a Chairman,with private sector experience, up to three otherprivate-sector directors, and three directors from thepublic sector of which two are ex-officio directors (theSecretary-General of the Treasury and the Governorof Bank Negara Malaysia).

2.3 The Corporation’s senior management (“Management”),led by the Chief Executive Officer, is responsible fortranslating Board directions into action and managingthe Corporation’s day-to-day operations. In addition,Management is responsible for supporting the Board infulfilling their governance responsibilities. The Boardalso wishes to record their expectations in that regard.

C. ROLE AND RESPONSIBILITIES OFTHE BOARD

1.1 The Board provides the stewardship and oversight ofthe management and operation of the Corporation.The Board’s role is to foster the Corporation’s shortand long-term success consistent with its mandatedobjectives and accountability to other stakeholders.

As such, the Board provides leadership with thespecific responsibilities of:

a) reviewing and overseeing the development of, andapproving, a strategic plan and direction for theCorporation, taking into account opportunities,threats and risks facing the Corporation;

b) approving the Corporation’s material policies;

c) setting performance objectives, monitoringimplementation of agreed corporate plans and thecorporate performance of the Corporation againstits business objectives, strategies and plans, andoverseeing major capital expenditures, acquisitionsand divestitures;

d) reviewing and approving the Corporation’s annualbudget and ensuring the integrity of financialstatements, internal controls, financial informationsystems, projections, forecasts and audited statements;

e) working with Management to identify the principalrisks to the Corporation and ensuring that systemsto manage those risks are in place;

f ) ensuring compliance with legal and regulatoryrequirements;

g) ensuring that reporting, monitoring and accountabilityas set out in the Corporation’s policies are met;

h) ensuring that the Corporation has an appropriatecommunications strategy;

i ) approving , monitor ing and rev iewing theeffectiveness of, governance practices, and in thisconnection, ensuring that controls, codes orguidelines are in place governing ethical conduct,conflict of interest and similar concerns;

j ) providing for the Board’s good management and on-going effectiveness, including the establishment ofcommittees, task forces and work groups necessaryto assist the Board in the effective discharge of itsmandate;

k) identifying the required competencies and personalattributes required on the Board and recommendingto the Minister of Finance the orderly successionof board members;

l) assessing and reviewing its own performance andcapability in carrying out its role and functionswithin the nature, scope, complexity and riskprofile of the Corporation;

m) identifying, assessing and recommending a suitablecandidate for the position of Chief ExecutiveOfficer (‘CEO’), assessing his or her performanceagainst pre-determined performance benchmarksand planning for CEO succession; and

n) succession planning, including appointing, training,fixing the compensation of and where appropriate,replacing senior management.

Sources and rationale

1.2 All of the stated responsibilities above are sourced from‘Best Practice Guidelines – Governance and DisclosureGuidelines for Governing Boards of British ColumbiaPublic Sector Organisations’, Board Resourcing andDevelopment Office, Office of the Premier (February2005) (the “BRDO Guidelines”), page 13.

1.3 Most of the responsibilities (e.g. strategic plan, identifyingprincipal risks, communications policy, internal controlsystems and compliance with law) also reflect all 6principal responsibilities of the Board under described inthe ‘Malaysian Code on Corporate Governance’, by theFinance Committee on Corporate Governance (January2001) (the “Malaysian Code”), page 11.

D. STANDARDS OF BEST PRACTICEOR BEHAVIOUR

l. THE BOARD – (STANDARD Nos. 1 TO 4)

Standard No. 1 : Independence of the Board

Board members will exercise independent judgement.

1.1 The Board should ensure that the Corporation isconforming to legislation and its mandate and achievingagreed outcomes. Accordingly, it is crucial that directorsthat lead the Board will uphold the public policy objectivesof the Act.To fulfill the Corporation’s mandate, the Boardmust exercise independent judgement in directing andoverseeing operations.

1.2 Directors should be able to work co-operatively withManagement and, where necessary, demonstrateobjectivity and robust independence of judgement.The Board may exercise independent judgement invarious ways including the following –

a) Board members provide invaluable input but donot, however, serve on the Board under the specificdirection of the Minister of Finance. Directors whoare public servants should exercise independentjudgement in ways that best fulfil theirresponsibilities to the Corporation.

b) The Board should act as a sounding board, andchallenge the assumptions, identified alternatives,and assessments contained in the corporate planand other proposals.

c) The Board should satisfy itself that the views ofManagement have been questioned and tested.TheBoard should actively challenge Managementproposals.

d) The CEO should attend all Board meetings.

e) The Board should, as part of the Board meetings,regularly hold in camera sessions without Management.

f ) A Board member should be able to obtainindependent financial, legal or other advice from anoutside adviser, at the expense of the Corporation,where appropriate. There should be an approvedBoard policy for directors, in furtherance of theirduties, to take independent professional advice atthe Corporation’s expense, if necessary.

Expectations of the Board from Management

1.3 To enable the Board to properly exercise independentjudgement, Management will ensure that all reportsprovided by it to the Board are objective, timely,relevant, accurate and complete and Management willcarry out instructions as directed by the Board.




1.4 Further to the Act, the CEO is not a member of theBoard. Accordingly, there is a clear separation of dutiesand responsibilities between the Board and Management.There is also a separation of the position of Chairmanfrom the CEO. This helps ensure independence and abalance of power and authority, where no one individualhas unfettered powers of decision.

1.5 The Malaysian Code, in its Explanatory Notes onPrinciple II in paragraph 4.2 on page 22 states thatdirectors should be able to work co-operatively withmanagement and to demonstrate objectivity androbust independence of judgement when necessary.

1.6 The Canadian Joint Committee on CorporateGovernance in its publication “Beyond Compliance:Building a Governance Culture”, (November 2001) (the“Canadian Joint Committee Report”) identified thefollowing four conditions that can materially assistboards in developing a culture that provides opportunityfor both directors and management to feel comfortablewhen management positions are challenged:

• strong board members who are independent ofmanagement, provided with appropriate orientation,and who bring an appropriately diverse set ofexperiences, competencies, skills and judgement tothe board;

• strong leadership within the board from an outsidedirector;

• a CEO who understands the role of the board andis openly supportive of building a healthy governanceculture; and

• regular meetings of the directors withoutmanagement to build relationships of confidence,and cohesion among themselves.

1.7 The approach of engaging external advisers is aprivate sector practice (See The Malaysian Code,Explanatory Note on Best Practice Guideline XX,page 43). However it is gaining acceptance in thepublic sector, particularly in larger agencies with morecomplex administrative responsibilities or significantprospective change agendas. The IFAC Study, inChapter 4 on page 16, paragraph .080, for example,

states “Governing bodies of public sector entitiesneed to establish appropriate arrangements to ensurethat they have access to all such relevant information,advice and resources as are necessary to enable themto carry out their role effectively.”

1.8 The Malaysian Code, Explanatory Note on PrincipleIII, paragraph 4.3, on page 22 sets out the need forManagement to provide the Board with timelyinformation, as set out in the Board’s expectations ofManagement above.

Standard No. 2 : Board effectiveness andgovernance responsibilities

The Board will obtain and maintain an understanding ofthe Corporation’s objects and powers, as well as of itsgovernance responsibilities.

To achieve this, the Board will:

i) develop and maintain approaches to fulfilling thoseresponsibilities and will evaluate, objectively, on a regularbasis, its effectiveness in doing so.

ii) ensure that the Corporation has arrangements forthe orientation of new directors and ongoing trainingappropriate to the Board’s governance responsibilitiesand needs.

2.1 Board members and in particular, ex-officio directors,can assist the Board to better appreciate public policyobjectives, to understand the broad public policyphilosophy and the direction that should be pursuedby the Corporation.

2.2 The Board should also develop a process to annuallyevaluate the effectiveness of the Board, its committeesand the directors individually.

2.3 Newly appointed directors should be provided withadequate orientation and training with regard to theirresponsibilities to the Corporation, the Corporation’srelationship with the Government, compensationpolicies for the Corporation’s Management and boardprocedures.


2.4 Management, led by the CEO, will provide the Boardwith information in a form and of quality appropriate toenable the Board to discharge its duties. Managementshould ensure there are procedures in place to ensurethat the Board is supplied in a timely fashion withinformation.

2.5 Management will also put in place a procedure for theorientation, training, education and information for newdirectors relating to the governance responsibilitiesand needs. Management will ensure that each newdirector receives an information package containingat least a copy of this policy, the latest copy of the Actand other relevant laws, the Corporation’s Code ofEthics, other relevant background material such as thebody’s latest Corporate Plan and Annual Reports andAccounts, notes describing the body’s organisationalstructure and statutory basis of operation, positiondescriptions for the members of the Board, theChairperson and the CEO, as well as the by-laws ofthe Board.


2.6 Pursuant to subsection 11(1) of the Act, the Board isresponsible for the conduct of the business and affairsof the Corporation and shall exercise all powers anddo all acts that may be exercised or done by theCorporation. Accordingly, it is important that theBoard understands its responsibilities and evaluatesobjectively on a regular basis, its effectiveness in fulfillingthose responsibilities.

2.7 For this purpose, the Board should also develop aprocess to annually evaluate the effectiveness of theBoard, its committees and the directors individually.TheCanadian Joint Committee Report, on page 18, broadlysupports this view, stating that “… regular assessment of the board’s effectiveness, and the contribution ofindividual directors, is essential to improve governancepractices. The governance system should include aprocess for the evaluation of the work of the board,its committees, and individual directors.”

2.8 An effective mechanism for evaluating its owneffectiveness may be the implementation of a ‘corporategovernance health check’, i.e. a formal annual boardreview with the introduction of formal performancemeasures. Five important criteria essential forevaluating board performance are:

• an understanding of the company’s mission andstrategic plan;

• a comprehension of the organisation’s business;

• a willingness to challenge management whenrequired;

• a willingness to appraise the chief executive officer;and

• the special expertise that board members have toadd value to the company.

2.9 The IFAC Study, Chapter 4, on page 16, paragraph .079states that “Members of the governing body need toreceive appropriate induction training on the firstoccasion of appointment to the governing body, andsubsequently as necessary.”

2.10 The Malaysian Code, in its Explanatory Note on BestPractice Guideline III, paragraph 4.3, on page 22 setsout the need for Management to provide the Boardwith timely information, as elaborated in the Board’sexpectations of Management above.

Standard No. 3 : Role and responsibilities of committees

Where the Board appoints a committee, it will establish theresponsibilities and authority of Board committees, as well asaccountability requirements for them.

3.1 It is sound practice for the Board to establish theresponsibilities and authority of Board committees,as well as accountability requirements for them. Inparticular, the Board should establish an auditcommittee comprising not less than three directors.

3.2 Where the Board delegates to committees, the Boardshould ensure that:

a) each committee, and its Charter, are established bya formal resolution of the Board or through anappropriate corporate by-law;

b) committee members are selected on the basis oftheir expertise, interests and availability; and



c) board members are regularly informed of eachcommittee’s activities, findings, conclusions andrecommendations.


3.3 Management wi l l provide the Board withrecommendations on the roles and limits of decision-making authority of Board committees for the Board’sconsideration.


3.4 The Malaysian Code, in its Best Practice GuidelineXXIII, on page 15 states “Where a board appointsa committee, it should spell out the authority ofthe committee, and in particular, whether thecommittee has the authority to act on behal fof the board, or s imply has the authority toexamine a particular issue and report back to theBoard with a recommendation.”

Standard No. 4 : Board composition and succession

The Board constitution should maintain independence,and there should be an appropriate mix of skills andcapabilities, given the objectives and strategic direction ofthe Corporation.

To achieve this, the Board will, in consultation with the CEO:

i) develop a profile of desirable skills and capabilitiesthat would best enable the Board to fulfill theirresponsibilities and advise the Minister of Finance ofthe desired mix that should be sought in filling upcomingnon ex-officio Board vacancies.

ii) have a Board succession plan to recommend to theMinister of Finance the orderly turnover of directors.


4.1 Management will:

a) provide the Board with recommendations for theconsideration of the Board on the desired mix ofdirector skills and capabilities, and in particularthose skills and capabilities that should be sought infilling upcoming non ex-officio vacancies;

b) develop a competency matrix that is updatedannually and when vacancies arise.The competencymatrix may be used to identify competency “gaps”on the board and direct the search for newcandidates; and

c) assist in the development of a board successionplan to recommend to Minister of Finance theorderly turnover of directors.


4.2 Best Practice Guideline 1 of the BRDO Guidelines,on page 12, recommends the following:

a) The Board is made up of individuals who, collectively,have the required competencies and personalattributes to carry out their responsibilities effectively.

b) Unless specified otherwise in the governinglegislation, Board members are independent frommanagement and have no material interest in theorganisation.

c) The Board has a committee that develops directorselection criteria and identifies and evaluatespotential candidates.

d) The Board has a competency matrix that is updatedannually and when vacancies arise. The competencymatrix is used to identify competency “gaps” on theboard and direct the search for new candidates.

e) The Board has a board succession plan to recommendto Government the orderly turnover of director.

f ) The Board publishes the name, appointment termand a comprehensive biography of each director.

4.3 The literature on board performance places greatweight on selecting appropriate directors and theCEO. It also advocates choosing board members thatare multi-skilled, experienced in a variety of businessareas, prepared to update their knowledge, flexible,analytical, and prepared to monitor and assess theirindividual or collective capabilities.

4.4 In the private sector, it is common to have a mix ofinternal and external directors to complementthe skills and perspectives of company executivemembers, and to provide greater independence from

management. The Malaysian Code, in its Best PracticeGuideline III, on page 12 states that directors “ … shouldbe persons of calibre, integrity and have the necessaryskills and experience to bring independent judgement tobear on issues of strategy, performance and resourcesincluding key appointment and standards of conduct…”

4.5 In relation to board succession, The Malaysian Code,in its Explanatory Note on Best Practice Guideline Xon page 37 states “The Board should at least annuallyidentify the mix of skills and experience and otherqualities it requires for it to function completely andefficiently. It is …possible for a board to accessparticular skills and experience either within thecompany or from external advisers. However, …it islikely that there will be certain skills and experiencewhich are so strategic and fundamental to successthat they should exist at the board level itself...”

ll. DIVISION OF RESPONSIBILITIES ANDACCOUNTABILITY – STANDARD Nos. 5 TO 8

Standard No. 5 : Role and responsibilities of theChief Executive Officer

The responsibilities and accountability of the Chairman andthe CEO should be clearly distinguished and documented.

In this connection, the Board will:

i) develop a position description for the CEO;

ii) develop a set of corporate objectives at least annually forwhich the CEO is responsible for achieving and evaluatethe performance of the CEO against those objectives;

iii) establish an accountability relationship for the CEOto the Board.

5.1 The principles of corporate governance require thoseinvolved to identify and articulate their responsibilitiesand their relationships; consider who is responsible for what, to whom, and by when; acknowledge therelationship that exists between stakeholders and thosewho are entrusted to manage resources; and deliver

required outcomes. It provides a way forward to those,whether in the public or private sectors, who findthemselves in somewhat different relationships thanperhaps they have previously experienced.

5.2 A clear understanding and appreciation of the rolesand responsibilities of the relevant participants in thegovernance framework, importantly, responsibilities ofthe Minister, Board and CEO, are key components ofsound accountability. The absence of these featuresweakens accountability and threatens the achievementof organisational objectives.

5.3 Section 19 of the Act provides for the Minister ofFinance to appoint a CEO, on the recommendation ofthe Board, and the CEO shall be responsible for theday-to-day administration of the business and affairsof the Corporation. Generally, therefore, the Boardshould avoid participating in the day-to-day managementof the business of the corporation.The CEO’s task is,therefore, to run the business and implement thepolicies and strategies adopted by the Board.

5.4 In recognition of the importance of the position ofthe CEO, the Board should also periodically assess theCEO’s position and evaluate the CEO’s performanceagainst the established duties and objectives that wereagreed to by the Board and the CEO at the start of the year. The Board, through the Chairman, shouldcommunicate the results of the CEO’s performanceevaluation to the CEO and to the Corporation.

5.5 Furthermore, the Board should periodically reviewthe allocation of responsibilities between the Boardand Management.This review should focus on definingand describing both the Board’s principal responsibilitiesand the limits to Management’s authority. It is alsosound practice for the Board to evaluate, on a regularbasis, the effectiveness and prudence of Managementin managing the operations of the Corporation andthe risks to which the Corporation is exposed.




5.6 Management will provide the Board with recommendationson the above for consideration by the Board.


5.7 The BRDO Guidelines in section 7 on page 24 states“In order to establish the proper relationship betweenthe Board and the CEO, the Board should, with theinput from the CEO, develop a job description for theCEO, annually develop appropriate performanceexpectations and have a formal process in place toevaluate the CEO’s performance.”

Standard No. 6 : Appointment of senior corporate officers

The Board will appoint the senior corporate officers ofthe Corporation (other than the CEO) and determinetheir terms of office and compensation.

6.1 It is important for senior management positions tobe filled by suitably qualified individuals capable ofmanaging the operations of the Corporationeffectively and prudently, and plan for their succession.In particular, there will be senior corporate officerswho are directly responsible to the Board.Accordingly,it is appropriate that the Board should appoint suchofficers of the Corporation.

6.2 Under section 21(1) of the Act, such officers shallhold office for such periods, receive such salaries,allowances and benefits, and shall be subjected to suchterms and conditions of service as may be determinedby the Board.


6.3 Management will provide the Board with recommendationsfor its consideration regarding the appointment ofsenior corporate officers (other than the CEO).


6.4 In particular, there will be officers who are directlyresponsible to the Board. For example, the IFACStudy, page 17, paragraphs 0.087 and 0.088recommends there should be an officer who isresponsible to the governing body for ensuring thatappropriate advice is given to the governing body onall financial matters, for keeping proper financialrecords and accounts, and for maintaining an effectivesystem of internal financial control. Also, there shouldbe an officer who is responsible to the governingbody for ensuring that governing body proceduresare followed, and that all applicable statutes andregulations and other relevant statements of bestpractice are complied with. It is therefore appropriatefor the Board to appoint senior officers (other thanthe CEO) who will be accountable to it.

Standard No. 7 : Compensation of officers

The Board will satisfy itself, on a regular basis, that thecompensation of the Corporation’s officers and employeesis consistent with the sustainable achievement of theCorporation’s objects, the prudent management of itsaffairs and the risks to which it is exposed and adherenceto its policies and procedures.

The Board will review the compensation program for alldirectors, and make recommendations to the Minister ofFinance in that regard.

7.1 Levels of remuneration for officers and employeesshould be sufficient to attract and retain them to runthe entity successfully. Further to subsection 21(1) ofthe Act, officers and employees appointed by theCorporation shall hold office for such periods, receivesuch salaries, allowances and benefits, and shall besubjected to such terms and conditions of service asmay be determined by the Board.

7.2 Under section 20(b) of the Act, the CEO shall enjoysuch compensation and such other amenities asapproved by the Minister, upon recommendation ofthe Board. Given the importance of the role of theCEO, his compensation package should also beconsidered by the Board and reviewed annually.

7.3 Similarly, it may be necessary to consider thecompensation program for non ex-officio directors forrecommendation to the Minister. Further to section16 of the Act, the Corporation may pay a director of the Board such fees, remuneration or other allowancesas the Minister may determine, on the recommendationof the Board.


7.4 Management wi l l prov ide the Board withrecommendations on the compensation of theCorporation’s officers and other employees for theBoard’s consideration on a regular basis.


7.5 The IFAC Study, page 17, paragraph .089 to .091, states:

• Levels of remuneration of members of the governingbody need to be sufficient to attract and retainthem to run the entity successfully.

• Public sector entities need to establish a formaland transparent procedure for developing policy on executive remuneration and for fixing theremuneration packages of individual members of thegoverning body. It is appropriate that no member isinvolved in deciding his or her own remuneration.

7.6 In the context of the Board members of theCorporation, in particular as the final decision onremuneration lies with the Minister, members do notdecide his or her own remuneration.

Standard No. 8 : Succession planning

The Board will plan for the succession of the CEO andreview succession plans for key senior management.

8.1 As part of its responsibility for the stewardship of theCorporation, the Board should approve Management’ssuccession plan including appointing, training andmonitoring of senior management. The successionplan should, in particular, deal with the CEO’s plansfor the appointment, training, assessing and motivatingof managers.

8.2 The Board should review and discuss the CEO’s proposalsto appoint and to promote key senior managers.

8.3 The Board must be satisfied that the Corporation’sprograms to train and develop Management willprovide for the orderly succession of Management.

8.4 Under the Act, the Minister appoints the CEO onrecommendation of the Board.Accordingly the Boardwill also consider the CEO’s succession plan for theCEO, for recommendation to the Minister.


8.5 Management will review and discuss with the Boardsuccession planning for senior management.

8.6 Management will also provide the Board withrecommendations on succession planning for theCEO and Board-appointed officers. Management willalso plan for the training of Board-appointed officersand the monitoring of their performance.


8.7 The Malaysian Code, page 28, states that the Boardshould be responsible for succession planning, includingappointing, training, fixing the compensation of, andwhere appropriate, replacing senior management.

lll. STANDARDS OF BEHAVIOUR –STANDARD No. 9

Standard No. 9 : Standards of Behaviour and Ethics

The Board will establish standards of conduct and ethicalbehaviour for Directors and for the Corporation’s officersand other employees, and obtain, on a regular basis,reasonable assurance that the Corporation has anongoing, appropriate and effective process for ensuringadherence to those standards.

9.1 As stated earlier, a fundamental principle of governancefor a public body is integrity, comprising “straightforwarddealing and completeness”. Integrity is based on honestyand objectivity, and high standards of propriety andprobity in the stewardship of public funds and resources,and management of the Corporation’s affairs. Integrity isdependent, among other things,on the personal standardsand professionalism of the individuals within the entity.



9.2 Accordingly, the Board will approve by-laws concerningconflicts of interest and post-employment mattersrelating to conflicts of interest in respect of directors,officers and employees of the Corporation.


9.3 Management will provide the Board with recommendationsrespecting standards of conduct and ethical behaviourfor directors, officers and employees.

9.4 Management will also develop and implement anongoing, appropriate and effective process for ensuringadherence to the Corporation’s standards of conductand behaviour and provide the Board periodically (andat least annually) with reports that will enable the Boardto assess the quality of the Corporation’s process forensuring adherence to these standards.


9.5 Paragraph 9.1 reflects the IFAC Study’s discussion onintegrity, on page 12, Figure 3.1. The IFAC Study, inChapter 4, page 15, also recommends that governingbodies of public sector entities adopt a formal code ofconduct defining the standards of behaviour to whichindividual governing body members and all employeesof the entity are required to subscribe.

lV. CONTROL – STANDARD Nos. 10 TO 12

Standard No. 10 : Significant risks to the Corporation

The Board will:

i) obtain an understanding of the principal risks of thecorporation’s business;

ii) ensure that appropriate and prudent risk managementsystems to manage these risks have been implementedand review these regularly; and

iii) obtain reasonable assurance, on a regular basis, thatsystems are being adhered to and continue to effectivelymanage the risks affecting the Corporation.

10.1 It is an important responsibility of the Board to obtainan understanding of the principal risks to which theCorporation is exposed.

10.2 The integrity of an entity is also dependent on theeffectiveness of the control framework within anentity, its decision-making procedures and quality ofits financial and performance reporting. Accordinglythe Board should:

a) establish appropriate and prudent risk managementpolicies for the risks of the Corporation, and reviewthese policies on a regular basis (and at least annually),to satisfy itself that they continue to be appropriateand prudent; and

b) obtain reasonable assurance, on a regular basis (andat least annually), that the Corporation has aneffective enterprise risk management process andthat risk management policies are being adhered to.


10.3 Management will:

i) identify and assess the significance of the risks to theachievement of the Corporation’s objects, strategies,plans and operations;

ii) provide the Board regularly (or at least annually) withreports that will enable the Board to understand themanagement of the Corporation’s significant risks;

iii) recommend risk management policies for theCorporation’s significant risks to the Board, reviewthese policies periodically (and at least annually) toensure that they remain appropriate and prudent, andreport to the Board on the results of these reviews;

iv) provide the Board regularly (and at least annually)with reports that will enable the Board to be awareof any situations in which those risks are not beingmanaged in accordance with established policies, andassess whether the Corporation’s risk managementpolicies remain appropriate and prudent in anycircumstances and are being followed;

v) provide the Board regularly (and at least annually)with reports that will enable the Board to assesswhether the Corporation has an appropriate andeffective enterprise risk management process.


10.4 The Malaysian Code, page 28 considers that, as part ofthe overall stewardship responsibility, the Boardshould ensure that the principal risks of thecorporation’s business have been identified and thatappropriate systems to manage these risks have beenimplemented. It also states that the Board should alsoensure that systems are in place to monitor andmanage effectively the risks with a view to the long-term viability of the company. In the context of apublic body, these risks include risks affecting howwell the corporation fulfills its mandate.

Standard No. 11 : Control environment and internal audit

The Board will ensure that the Corporation has a controlenvironment that supports the prudent management of itsoperations and of the risks to which it is exposed(including risks to the attainment of its objects) and haseffective policies and practices to assure the integrity ofinternal controls and management information systems.

In this connection the Board will:

i) allocate resources for, and establish an internal auditgroup, setting out its mandate;

ii) approve its audit plan each year; and

iii) seek, from the internal audit group, on a regular basis,reasonable assurance regarding the monitoring of, andthe compliance with internal controls, the integrity ofthe system, and that appropriate action is being takento address any significant weaknesses or breakdownsidentified.

11.1 In light of the Corporation’s role in managing depositinsurance funds and as a statutory body, it isappropriate for the Board to set aside resources for,and establish an independent inspection and auditgroup for the Corporation, and to approve its planeach year. The Board will also seek, from theindependent inspection and audit group, on a regularbasis, validations that the institution’s processes,policies, procedures and controls are being monitoredand adhered to, and that appropriate action is beingtaken to address any significant weaknesses orbreakdowns that have been identified.

Expectations from the Board of Management

11.2 Management will ensure that the Corporation has acontrol environment that supports the prudentmanagement of its operations and of the risks to whichit is exposed and contributes to the achievement ofits objectives. It will provide the Board regularly (andat least annually) with reports that will enable theBoard to assess whether the Corporation has such acontrol environment.


11.3 The Board has financial accountability and oversightresponsibilities. Accordingly it must review financialperformance information, monitor systems of internalcontrols established by Management and the Board,and oversee the internal and audit process, with theassistance of its Audit Committee (BRDO Guidelines,paragraph 4, page 17). Generally organisations thatrequire an internal audit capacity are those with highrisk or high profile operations. (Ibid. page 19).

11.4 The internal audit function is an integral part of aneffective system of corporate governance. TheMalaysian Code, in the Explanatory Notes to BestPractice Guideline VII, paragraph 4.67 on page 51states that “The Board should establish an internalaudit function.Where an internal audit function doesnot exist, the Board should assess whether there areother means of obtaining sufficient assurance of theeffectiveness of the system of internal controls withinthe company.”

11.5 Accordingly internal auditors support the need for anorganisation to assure:

i) that existing management processes are adequateto identify and monitor significant risks facing theorganisation, and that the existing internal controlsystem operates effectively;

ii) that those who are responsible for managing risksand operating the control system take a whollyobjective and systematic view of their ownperformance; and

BOARD GOVERNANCE POLICY

iii) that the Board receives the quality of informationfrom Management needed to suppor t theorganisation’s risk management and internalcontrols effectively.

Standard No. 12 : In control

The Board will obtain, on a regular basis, reasonableassurance that the Corporation is “in control”.

12.1 The concept of being “in control” refers to the stateor condition wherein –

a) operations are subject to effective governance bythe Board,

b) are being managed in accordance with ongoing,appropriate and effective strategic and riskmanagement processes, and are being conducted inan appropriate control environment; and

c) any significant weaknesses or breakdowns relatedto those matters are being identified, andappropriate and timely action is being taken toaddress them.


12.2 Management will develop and implement anappropriate and effective process for assisting theBoard to assess regularly (and at least annually)whether the Corporation is “in control”.

V. STRATEGIC PLANNING – STANDARD No. 13

Standard No. 13 : Strategic management process

The Board is responsible for reviewing and overseeing thedevelopment of and approving a strategic plan anddirection for the Corporation, taking into account theopportunities and risks facing the Corporation.

To fulfill this responsibility, the Board will:

i) periodically assess the Corporation’s objectives toensure their continuing relevance and, if thoughtappropriate, propose changes for consideration bythe Minister of Finance;

ii) adopt a strategic planning process;

iii) at least annually, approve operating objectives andstrategies, an operating budget, capital budget,borrowing plan, corporate plan and premium rates thatare appropriate and prudent in light of the Corporation’sobjects, current and anticipated environment, risks,resources and financial position;

iv) regularly evaluate the Corporation’s performance inimplementing its approved plans, and budgets; and

v) obtain, on a regular basis, reasonable assurancethat the Corporation has an effective strategicmanagement process.

13.1 It is sound practice for the Board to:

a) establish the business objectives of the Corporation,consider and approve the Corporation’s businessstrategy and its business plans for significantoperations, and review those things at least once ayear to ensure that they remain appropriate andprudent in light of the institution’s current andanticipated business and economic environment,resources and results;

b) evaluate frequently the Corporation’s actualoperating and financial results against forecastresults, in light of the institution’s business objectives,business strategy and business plans; and

c) obtain, on a regular basis, reasonable assurance thatthe institution has an ongoing, appropriate andeffective strategic management process.

13.2 The Board should also:

a) examine its public policy objectives andperiodically the legislated mandate to ensure theircontinuing relevance;


b) assess the relevance of the Corporation’s mandate,and, if appropriate, propose changes for theconsideration of the Minister; and

c) ensure that all public policy objectives are clearlydescribed in the corporate plan annually approvedby the Board.


13.3 Management will periodically assess the continuingrelevance of the Corporation’s objects and powersand report to the Board on the results of thesereviews.

13.4 Management will periodically (and at least annually)develop recommendations for prudent and appropriateoperating objectives and strategies, an operatingbudget, borrowing plan, corporate plan and premiumrates that take into account the Corporation’sobjectives, current and anticipated environment, risks,resources and financial position, and submit suchrecommendations to the Board for their consideration.

13.5 Management will provide the Board regularly withreports that enable them to assess:

a) the Corporation’s performance in implementing itscurrent approved objectives, strategies, plans andbudgets; and

b) whether the Corporation has an appropriate andeffective strategic management process.


13.6 The “Principles and Better Practices - CorporateGovernance in Commonwealth Authorities andCompanies”, Discussion Paper by the AustralianNational Audit Office (May 1999) suggests on page 24,that the objectives of an (public sector) organisationneed to be clearly documented in a long termcorporate strategy (3 year minimum, updated annually)and an annual business plan together with achievableand measurable performance targets and milestones.The Board should be responsible for approving orrejecting the budget developed by Management toachieve the agreed strategy.

13.7 “Corporate Governance in Crown Corporations andOther Public Enterprises – Guidelines” by the Crown

Corporation and Privatization Sector, Department ofFinance and Treasury Board of Canada (June 1996), onpage 7 by way of guidance recommends that wherethe Board considers that the legislated mandate is nolonger valid in the current economic or social context,the Board should advise the Minister.

Vl. COMMUNICATIONS – STANDARD No. 14

Standard No. 14 : Effective communication

The Board will ensure that the Corporation communicateseffectively with the public, Bank Negara Malaysia, otherstatutory bodies or regulators, depositors, memberinstitutions and other relevant parties.

14.1 In implementing the above principle, the Board shouldbe assured that the Corporation’s systems supportingthe communications policy will anticipate those issueslikely to attract interest and, when appropriate, informthe Minister in a timely manner.

14.2 The Corporation, usually through the CEO or theChairperson, should inform the Minister of any significantdevelopments and decisions likely to have a major impacton the Corporation or on public perceptions andattitudes towards it. Any significant direct communicationbetween Management and the Minister of Finance shouldbe brought to the Board’s attention.

14.3 In respect of its communication with stakeholders,the Board must be satisfied with the main messagescontained in the Corporation’s annual report and,where applicable, in the documents tabled inParliament, namely, the Corporation’s annual reportcontaining the corporate plan summary, the budgetsummaries and “management discussion and analysis”.


14.4 Management will develop and recommendcommunications policies to the Board for theirconsideration.

14.5 It will also bring any direct communications onsignificant matters between Management and theMinister to the Board’s attention.





14.6 The BRDO Guidelines state, in Section 12 on page 32,that “Public sector organisations should be accessibleand responsive when communicating with theirstakeholders, their employees, the public and Government.It follows that the Board should ensure thatmanagement has adopted an appropriatecommunications strategy.The communications strategyshould reflect the fact that the organisation is part ofthe public sector where transparency is an importantfeature of accountability.The Board should be satisfiedthat all salient information about the organisation andits operations is made accessible by management.”

14.7 Note that section 36 of the Act provides that theaccounts of the Corporation shall be audited by theAuditor General, and requires the Corporation totransmit a copy of the annual accounts certified by theAuditor General within three months from the close ofits financial year and an annual report on the working ofthe Corporation throughout the year to the Minister,who shall, as soon as possible, cause them to be laidbefore the Dewan Negara and Dewan Rakyat.

VII. BOARD GOVERNANCE POLICY –STANDARD No. 15

Standard No. 15 : Review of Board Governance Policy

The Board will annually review this Board GovernancePolicy to ensure that it remains responsive to thecircumstances and needs of the Corporation and continuesto reflect the legislation to which the Corporation issubject, the Corporation’s mandate, guidance on mattersof governance specific to statutory bodies and recognised“best practices”.

15.1 Governance methodologies continue to evolve,especially in the context of public sector bodies, andthe operating environment of the Corporation maychange. Accordingly, it is appropriate that the BoardGovernance Policy be continually reviewed and itspractices updated to match opportunities andchanging needs.


15.2 Management will provide timely information andreports to the Board on trends and evolving bestpractices in the area of governance that may beapplicable to the Corporation.


15.3 “Principles and Better Practices - Corporate Governancein Commonwealth Authorities and Companies”,Discussion Paper by the Australian National Audit Office(May 1999) on page 26 states as a better practice that“The Board should adopt a written statement of its owngovernance principles and regularly evaluate them.”

List of references:

1. “Best Practice Guidelines – Governance and Disclosure Guidelines for Governing Boards of British Columbia PublicSector Organizations, Board Resourcing and Development Office (BRDO) in the Office of the Premier” (February 2005):BRDO was established in 2001 with a mandate to bring professional processes to the area of director appointmentand corporate governance in the public sector.

2. “Joint Committee on Corporate Governance (Canada), Beyond Compliance: Building a Governance Culture”,(November 2001)

3. “Governance in the Public Sector: A Governing Body Perspective, International Federation of Accountants”, (August 2001)

4. “Malaysian Code on Corporate Governance”, by the Finance Committee on Corporate Governance (January 2001)

5. “Principles and Better Practices - Corporate Governance in Commonwealth Authorities and Companies”, DiscussionPaper by the Australian National Audit Office (May 1999)

6. “Corporate Governance in Crown Corporations and Other Public Enterprises – Guidelines” by the CrownCorporation and Privatization Sector, Department of Finance and Treasury Board of Canada (June 1996)


165 166

• Approves material policies.

• Sets performance objectives, monitors implementationof agreed corporate plans and corporate performanceagainst business objectives, strategies and plans, andoversees major capital expenditures, acquisitionsand divestitures.

• Reviews and approves annual budget and ensures theintegrity of financial statements, internal controls,financial information systems, projections, forecasts andaudited statements.

• Works with Management to identify the principal risks tothe organisation and ensures that systems to managethose risks are in place.

• Ensures compliance with legal and regulatory requirements.

• Ensures compliance with reporting, monitoring andaccountability as set out in the Corporation’s policies.

• Ensures appropriate communications strategy.

• Approves, monitors and reviews the effectiveness of,governance practices, controls, codes or guidelinesgoverning ethical conduct, conflict of interests andsimilar concerns.

• Provides for the Board’s good management and on-goingeffectiveness, including the establishment of committees,task forces and work groups necessary to assist theBoard in the effective discharge of its mandate.

• Identifies required competencies and personal attributesrequired on the Board and recommends to the Ministerof Finance the orderly succession of board members.

• Assesses and reviews its own performance and capabilityin carrying out its role and responsibilities.

• Identifies, assesses and recommends a suitablecandidate for the position of Chief Executive Officer(“CEO”), assesses the incumbent’s performance andplans for CEO succession.

• Ensures succession planning for senior management.

KEY RESPONSIBILITIES OF MEMBERS OF THEBOARD INDIVIDUALLY

The key responsibilities of each member of the Board areas follows:

• Regularly attends board meetings and importantrelated meetings such as committee meetings or otherad-hoc meetings which he or she should attendincluding education and strategy sessions.

• Actively participates in policy dialogue and strategicplanning decisions.

• Makes inquiries and stays informed about board andcommittee matters, reads and understands allmaterials in advance of meetings, actively and criticallyreviews, evaluates and challenges Management proposalsand reports.

• Asks penetrating questions to ensure full understanding ofissues in question and consequences of actions proposedand in this connection, gains access to information orobtains clarifications from the CEO or the Corporation’ssenior corporate officers where necessary.

• Contributes knowledge and expresses points of viewbased on experience and skills.

• Understands and supports the Corporation’s Missionand Purpose, stays informed about the Corporationand its operating environment.

• Conducts regular evaluation of his or her individualperformance and capability as a director.

• Considers other points of view, make constructivesuggestions, and helps the Board to make collectivedecisions which reflect the thinking of the entire Board.

• Assumes board leadership responsibilities as requestedand when possible (such as committee chairperson).


INTRODUCTION

The Board of Directors of the Malaysia Deposit InsuranceCorporation (the “Corporation”) consists of the personsdescribed in subsection 11(2) of the Malaysia DepositInsurance Corporation Act 2005 (the “Act”). Boardmembership includes the Chairperson, who is from theprivate sector, two other directors from the private sector,and three other directors from the public sector.Two of thedirectors from the public sector are ex-officio members(the Governor of Bank Negara Malaysia, and the SecretaryGeneral of the Treasury). All non ex-officio members areappointed by the Minister of Finance (the “Minister”).

Any person holding positions in Parliament or who is anofficer of a member institution or affiliated with apolitical party is specifically prohibited from being adirector. In addition, the Minister may terminate orsuspend the appointment of a director on grounds set outunder subsection 14(2) of the Act.

Each member of the Board appointed by the Ministerholds office for a term not exceeding three years and iseligible for reappointment. Ex-officio members aredirectors for the duration of their tenure in theirrespective offices.

GENERAL ACCOUNTABILITY OF THE BOARDCOLLECTIVELY

The Board of Directors is responsible for the conduct ofbusiness and affairs of the Corporation. The Board isultimately accountable for achieving the Corporation’smandate in conformity with the Act and the by-laws ofthe Corporation.

DUTIES OF INDIVIDUAL MEMBERS OF THE BOARD

A director of the Board has a fiduciary duty and a duty ofcare. Under section 17 of the Act, a director of the Boardshall, at all times, act honestly and in the best interest of theCorporation and use reasonable diligence in the discharge ofduties of his office. Apart from the duty of care to act withreasonable diligence, the director also owes a fiduciary dutyto the Corporation.This means that directors must be loyaland act honestly, in good faith and in the best interests of theCorporation. A director or any person who has been adirector is also prohibited from making improper use of any

information acquired in the course of his position as adirector, and from doing anything which may be detrimentalto the interests of the Corporation.

BACKGROUND

The Corporation is established under the Act.The Act setsout the Corporation’s constitution, objects, powers andduties, the general terms of deposit insurance and othergoverning parameters. Under the Act, the Minister hasspecific oversight over certain key powers of theCorporation which affect interested parties or the public,such as setting the annual premiums for member institutions.

The Corporation functions within the legal frameworkestablished by the Act and is governed by other statutoryprovisions applicable to statutory bodies.The Corporation isultimately accountable, through the Minister, to Parliamentfor the conduct of its affairs1.

Membership in the Corporation includes commercial banksand Islamic banks.These two different groups have differentcharacteristics and operate under separate governinglegislation and regulatory frameworks.The Act provides thatthe Corporation shall separately administer an Islamicdeposit and a conventional deposit insurance system.

Under the Act, the Corporation’s objects are to:

1. administer the deposit insurance system under the Act;

2. provide insurance against the loss of part or all ofdeposits of a member institution;

3. provide incentives for sound risk management in thefinancial system; and

4. promote and contribute to the stability of the financialsystem in Malaysia.

In achieving its objects under paragraphs 2 and 4, theCorporation is required to act in such manner as tominimise costs to the financial system.

KEY RESPONSIBILITIES OF THE BOARD (AS SETOUT IN THE BOARD GOVERNANCE POLICY)

• Reviews and oversees the development of, andapproves, a strategic plan and direction, taking intoaccount opportunities, threats and risks.

POSITION DESCRIPTION:MEMBERS OF THE BOARD

OF DIRECTORS

1 A legal opinion has been obtained to this effect.

POSITION DESCRIPTION:MEMBERS OF THE BOARD

OF DIRECTORS

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• Builds and maintains a sound working relationshipwith the CEO.

• Oversees the performance of Management inexecuting the policies and procedures approvedby the Board, and generally ensures that theCorporation is well run in terms of the prioritiesof the Board, efficiency, effectiveness and financialprudence.

• Ensures that the boundaries between Board andManagement responsibilities are clearly understoodand respected and that relationships between theBoard and Management are conducted in aprofessional and constructive manner.

• With the assistance of the Audit Committee andBoard, manages conflicts of interest should they arise.

3. Other

• Spokesperson for the Board.


INTRODUCTION

The Chairperson of the Board of Directors presides at allmeetings of the Board and provides leadership to theDirectors in accomplishing their mandate, in conformity withthe Malaysia Deposit Insurance Corporation Act 2005 (the“Act”) and the by-laws of the Corporation.The Chairpersonof the Board is appointed by the Minister of Finance inaccordance with the Act and must have relevant privatesector experience.The Chairperson holds office for a termnot exceeding three years and is eligible for reappointment.

BACKGROUND

The Malaysia Deposit Insurance Corporation (the“Corporation”) is established under the Act.The Act sets outthe Corporation’s constitution, objects, powers and duties,the general terms of deposit insurance and other governingparameters. The Corporation functions within the legalframework established by the Act and is governed by otherstatutory provisions applicable to statutory bodies. TheCorporation is ultimately accountable, through the Ministerof Finance, to Parliament for the conduct of its affairs1.

Membership in the Corporation includes commercial banksand Islamic banks.These two different groups have differentcharacteristics and operate under separate governinglegislation and regulatory frameworks.The Act provides thatthe Corporation shall separately administer an Islamicdeposit and a conventional deposit insurance system.







KEY RESPONSIBILITIES

1. Ministers and Parliament

• Represents the Corporation at meetings with theMinister of Finance or other senior Governmentofficials.

• When invited, attends meetings before parliamentarysub-committees2.

2. CEO, Management and Board of Directors

• Presides at all meetings of the Board and organisesthe business of the Board and determines procedureat and conduct of Board meetings.

• Provides leadership to achieve overall boardperformance.

• Works with the Board and CEO to develop broadpolicy directions for the Corporation and to advancethe objects of the Corporation for Board approval.

• Ensures that Management responds satisfactorily tothe needs of the Board for information and otherrequirements.

• Ensures that the responsibilities of the Board, BoardCommittees and individual Directors, as set outin the Charters or Position Descriptions, are wellunderstood by the Board and individual Directorsand are executed as effectively as possible.

• Leads regular evaluation of the Board, Chairperson,Committee and Directors as the Chairman of theGovernance Committee.

• Develops and maintains effective workingrelationships with Management and facilitateseffective communication between Directorsand Management, both inside and outside ofBoard meetings.

• Has full and free access to the Corporation’sManagement for information and review of ideas andconsults with the CEO where operational prioritieswould be significantly affected.

POSITION DESCRIPTION:CHAIRPERSON

POSITION DESCRIPTION:CHAIRPERSON


2 E.g. Jawatankuasa Wang Negara of Dewan Rakyat has the power to summon external parties to address matters raised by Members of Parliament regarding accounts submittedto Parliament.To the best of our knowledge, this power has not in practice been exercised.

169 170

• Assists and advises foreign governments andinternational agencies on the development andoperation of effective deposit insurance regimes,subject to review with the Chairperson and theapproval of the Board, where significant allocationsof employee time and resources are implied.

4. Operations

• Manages the principal risks inherent in theCorporation’s activities.

• Ensures that contingency plans and related actionplans are developed and implemented to manage risksto the Corporation.

• Ensures the development of necessary corporate by-laws and regulations.

• Ensures the development of a differential premium system.

• Ensures the development of an appropriatemethodology to assess the risks inherent in providingdeposit insurance.

• Plans the organisation of the Corporation andallocation of resources.

• Ensures that the Corporation consistently achievesplanned objectives and financial targets.

• Ensures that the services delivered by theCorporation are of consistently high quality.

• Ensures the full knowledge of the organisation isbrought to bear on decisions.

• Obtains and allocates resources required by theCorporation to meet its objectives.

• Leads the “Executive Management Committee” of theCorporation and acts as an ex-officio member of allother committees established by Management.

• Is a signing authority for the Corporation withinBoard-approved limits.

• Ensures that systems, practices and internal controlsare developed and maintained to meet the needs ofthe Corporation.

• Develops and recommends corporate plans andbudgets reflecting Board-approved strategic directions.

• Ensures that the Corporation adheres to its statutoryresponsibilities under the Act and by-laws and allother applicable statutes.

5. Human Resources

• Ensures the development of human resource plans andprograms sufficient to permit the Corporation to meetits objects and strategic and corporate objectives.

• Enhances human resource management throughrecruiting, directing, motivating, rewarding/discipliningand developing employee skills and expertise throughcoaching and training.

• Approves hiring, termination and remuneration(including annual bonuses where applicable) ofemployees other than corporate officers.

• Makes recommendations to the Board concerningthe hiring, termination and remuneration ofcorporate officers.

• Continuously evaluates the performance ofsenior management and takes appropriate actionas warranted.

• Carries out on a regular basis performance reviewsessions where results are compared to plan,exceptions explained and new proposals presented.

• Cultivates a corporate culture that enhances theCorporation’s performance and employee satisfaction.

• Motivates and enhances employee morale,competence and skills.

• Recommends and implements appropriatesuccession plans.

• Maintains a high quality staff complement, through fairand effective human resource management and makesrecommendations on salary policies that recognizeand reward performance.

• Provides an environment where employees aretreated fairly and given opportunities andencouragement to develop maximum potential.


GENERAL ACCOUNTABILITY

The Chief Executive Officer (the “CEO”) is the head of theMalaysia Deposit Insurance Corporation’s executive. TheCEO is accountable to the Board of Directors for theexercise of his powers and performance of his dutiesunder the Malaysia Deposit Insurance Corporation Act2005 (“MDIC Act”), the by-laws of the Corporationand the policies and directions of the Board. The CEO isappointed by the Minister of Finance (the “Minister”), onrecommendation of the Board.

BACKGROUND

The Ma lays i a Depos i t Insurance Corporat ion(the “Corporation”) is established under the Act.The Act sets out the Corporation’s constitution, objects,powers and duties, the general terms of deposit insuranceand other governing parameters. The Corporationfunctions within the legal framework established by theAct and is governed by other statutory provisionsapplicable to statutory bodies. The Corporation isultimately accountable, through the Minister of Finance,to Parliament for the conduct of its affairs1.

Membership in the Corporation includes commercial banksand Islamic banks.These two different groups have differentcharacteristics and operate under separate governinglegislation and regulatory frameworks. The Act providesthat the Corporation shall separately administer an Islamicdeposit and a conventional deposit insurance system.







KEY RESPONSIBILITIES

1. Ministers and Parliament

• With the Chairperson, attends meetings with theMinister of Finance or other senior Governmentofficials when necessary to discuss the achievementof the Corporation’s objectives, performance andfinancial results.

• When invited, attends meetings before parliamentarysub-committees2.

2. Chairperson and Board of Directors

• Works with the Chairperson and the Board to developpolicies to advance the objects of the Corporation andrecommends such policies to the Board for approval.

• Informs the Chairperson and the Board of anyfinancial and other development that in the CEO’sopinion are likely to have a material effect on theperformance of the Corporation.

• Reviews intervention initiatives with the Chairpersonand makes recommendations to the Chairperson andthe Board concerning such interventions designed toadvance the objectives of the Corporation.

• Strives to provide good working relationships, opencommunication and discussions with the Chairpersonand seeks guidance from the Chairperson on allsignificant matters related to the Corporation.

• Attends meetings of the Board of Directors.

3. Other government and international agencies

• Develops effective working relationships, co-ordinationand exchanges of information with the managementof relevant Government departments and statutorybodies or regulators (Ministry of Finance, BankNegara Malaysia), government agencies andcounterparts in other jurisdictions.

• Promotes and advances the Corporation’s imageand reputation internationally through providingleadership on deposit insurance matters generally,such as chairmanship of the International Associationof Deposit Insurers, and availability at internationalseminars or conferences.

POSITION DESCRIPTION:CHIEF EXECUTIVE OFFICER



2 E.g. Jawatankuasa Wang Negara of Dewan Rakyat has the power to summon external parties to address matters raised by Members of Parliament regarding accounts submittedto Parliament.To the best of our knowledge, this power has not in practice been exercised.


CORPORATE BY-LAWS

Under subsection 12(1)(d) of the Malaysia Deposit InsuranceCorporation Act 2005, the Board may make such by-laws asare necessary or expedient in relation to the administration,management, control, business, assets and affairs of theCorporation, including the rules and procedures to beobserved by the directors at Board meetings.

This By-law is made by the Board and relates generally tothe regulation of the affairs and conduct of the business ofPerbadanan Insurans Deposit Malaysia (the “Corporation”).

PART 1 – INTERPRETATION

1.1 DefinitionsIn this By-law, unless another meaning is stated oris dictated by the context, words or phrases havethe meaning given to them in the Malaysia DepositInsurance Corporation Act 2005 and:

“Act” means the Malaysia Deposit InsuranceCorporation Act 2005,

“Board” means the board of directors of the Corporation,

“Chairperson” means the chairperson of the Board,

“Chief Executive Officer” means the chief executiveofficer of the Corporation,

“Committee” means any committee of the Board,

“Corporate Secretary” means the corporatesecretary of the Corporation,

“Director” means any Director of the Corporation,and a reference to a particular Director means theindividual holding that position for the time being,

“employee” means any employee of the Corporation,whether full-time or part-time and whetheremployed for an indefinite or a fixed or otherwiselimited term,

“ex-officio Director” means any of the Governorof Bank Negara Malaysia or the Secretary-General ofthe Treasury, appointed as a Director pursuant toparagraphs 11(2)(b) and (c) of the Act, and “nonex-officio Director” correspondingly means any of theother Directors,

“Officer” means any officer of the Corporationappointed by the Board, and a reference to aparticular Officer means the individual holding thatoffice for the time being, and

“person” includes an individual, a body corporate,a general or limited partnership, a joint venture, a trust,an unincorporated organisation or association, agovernment or an agency or instrumentality of agovernment.

1.2 Statutory ReferencesIn this By-law a reference to a statute includes anyregulation made under the authority of that statuteand includes such statute or regulation as amendedor re-enacted from time to time.

1.3 Relation to StatutesIn the event that any provision in this By-law iscontrary to a provision of the Act, the provision in theAct prevails.

1.4 Relation to ResolutionsNothing in this By-law prevents the passage oradoption of any resolution that does not require orpermit the taking of an action that is contrary to aprovision of this By-law.

1.5 Always SpeakingIn this By-law, a reference to a resolution, approval,appointment, delegation or other action includesthe same as it may be amended, varied, replaced orrevoked from time to time.

PART 2 – THE BOARD

2.1 Composition, appointment and term1) The Board of Directors shall comprise members who

are appointed in accordance with the Act1 andmembers shall hold office for such term inaccordance with the Act2.

1 Subsection 11(2) of the Act.

2 Subsection 13 of the Act specifies that the directors shall hold office for a term not exceeding 3 years and shall be eligible for reappointment and that ex-officio Directors holdfor the duration of their tenure in the relevant office.

6. Reporting

• Provides to the Board as deemed appropriate periodicreports on the operations of the Corporation,highlighting any significant issues that have arisen orseem likely to arise.

7. Other

• Spokesperson for the Corporation.

• Maintains working relationship with members,industry associations, accountants, lawyers and others.

• Ensures that the Corporation fully complies with linguistic,employment equity and other regulatory provisions.

• Enhances the credibility and image of the Corporationby communicating effectively.

• Clarifies and communicates the corporate mission,vision and values.

• Encourages community and society responsibilitycontributions by the Corporation and its employees.

8. Major challenges

• To support the Board in determining the Corporation’slong term direction and strategies in response to thefinancial sector environment.

• To maintain strong core capacity to assess the risk oflosses likely to arise from insuring deposits inmember institutions.

• To reduce the risk of losses through effective riskmanagement, prompt corrective action, early andeffective intervention and resolution.

• To develop and implement a differential premium system.

• To maintain efficient, cost effective operations byretaining core competencies and high qualityhuman resources, applying an effective performancemeasurement system.

• To deploy resources to defined priorities, and keeppace and apply advancements in technology.

• To ensure that the Corporation keeps abreast ofdevelopments and emerging issues affecting thefinancial services industry, both in relation toconventional and Islamic banking.

• To develop the Corporation’s best practices andcorporate memory through documented policiesand practices.

• To develop programs designed to educate the publicas to the nature of deposit insurance and theproducts that are and are not covered by it, therebycontributing to public confidence in the financialsystem and the stability of that system.

• To ensure that appropriate regulations are developedand implemented to make the Act operational.

• To maintain collaborative working relationshipsand co-operation with supervisory bodies andother stakeholders.




4) Notice of the reconvening of an adjourned meeting ofthe Board is not necessary if the time and place of thereconvened meeting is announced at the time ofadjournment. However if a meeting is adjourned fora period of more than forty-eight (48) hours, anyDirector who was not present at the time of theadjournment must be notified by the Chairperson orthe Corporate Secretary of the time and place of thereconvened meeting. Such notification may be writtenor oral, but if oral should be confirmed in writing assoon as practicable.

3.5 Special Calling of Meetings1) If, in the opinion of the Chairperson, it is necessary or

advisable for a specific matter to receive the attentionof the Board at a meeting before notice can be givenin the usual manner, the Chairperson may determinethe period and content of the notice provided to theother Directors for that meeting. Notice of sucha meeting may be given in writing or orally, but if givenorally should be confirmed in writing as soonas practicable.

2) Any two (2) Directors may request that theChairperson call a meeting of the Board, stating thebusiness requested to be transacted, and uponreceiving such a request the Chairperson shallforthwith call the meeting. Such a request may bemade in writing or orally, but if made orally should beconfirmed in writing as soon as practicable.

3) If the Chairperson is absent or incapacitated and, inthe opinion of any four (4) of the other Directors,it is necessary or advisable for a meeting of the Boardto be called before the Chairperson will be able todo so, those Directors may call a meeting in place ofthe Chairperson.

4) Except as modified by this section, the otherprovisions of this By-law apply to meetings calledpursuant to this section, being adapted to the case asnearly as practicable.

3.6 Waivers of NoticeA Director may waive notice of a meeting of theBoard by any means. Attendance by a Director at ameeting is a waiver of notice unless he or she attendsin order to object to a default or defect in the givingof notice of the meeting and does so expressly.

3.7 Validity of Actions1) A resolution passed or other action taken at a

meeting of the Board in respect of which notice hasbeen given shall be valid even if, by inadvertence, thenotice is not actually received by a particular Directoror there is an error in or omission from the contentsof the notice which does not affect its substance12.

2) The Board may act notwithstanding any vacancy andits proceedings or all acts done by any meeting of theDirectors or committee shall not be invalidated by (a)the absence of any Director (b) any defect afterwardsdiscovered in the appointment or qualification ofany Director or the constitution of the Board (c)any omission, defect or irregularity in the conveningor conduct of the meeting or (d) the presenceor participation of a person who is not a Directorof the Board13.

3.8 Place of MeetingsA meeting of the Board may be held at any placein Malaysia.

3.9 Quorum for MeetingsThe quorum for a meeting of the Board shall be notless than four (4) Directors, at least two (2) of whommust comprise ex-officio Directors or a directorappointed from the public sector14.

3.10 Procedure at MeetingsSubject to the other provisions of this By-law andto any resolution of the Board respecting a specificmatter, the Chairperson shall determine theprocedure at and conduct of meetings of the Board.

3.11 Voting at MeetingsBoard decisions shall be made by a majority of thevotes of the Directors present and voting15. In theevent of an equality of votes the Chairperson has acasting vote16.

3.12 Participation by teleconferencing, live video, etc.The Chairperson may authorise a Director to usetelephone conference, live video, television links or other appropriate communication or multimediafacilities to participate in any meeting of the Board or Board Committee provided that, prior to themeeting, the Director has by notification to the

12 Subsection 15(1) of the Act provides that the proceedings of the Board shall notbe invalidated by any omission, defect or irregularity in the convening ofconduct of a meeting.

13 Section 15 of the Act.




CORPORATE BY-LAWSCORPORATE BY-LAWS

3 Subsection 14(2) of the Act provides the circumstances under which the Minister may terminate or suspend the appointment of the director including if he becomes of unsoundmind or otherwise becomes incapable of carrying out his duties, or any form of restriction or supervision under any law relating to the prevention of crime, etc., or he becomesa bankrupt, suspends payment or compounds with his creditors, charged with a criminal offence punishable with imprisonment, guilty of serious misconduct in relation to hisduties under the Act, or is absent, except with leave granted by the Minister in the case of the Chairman or by the Chairman in the case of all other directors from 2 of themeetings of the Board in any 12 month period.


5 Subsection 14(1) of the Act sets out the circumstances under which a Director would be disqualified from acting as such.


7 Subsection 11(1) of the Act. Section 25 of the Act specifically sets out the powers of the Corporation.



10 Subsection 14(2)(f) of the Act.

11 As recommended in the Putrajaya Committee on GLC High Performance’s Green Book on “Enhancing Board Effectiveness”.

2) The office of a Director shall be vacated if theDirector is:

a) removed from office by the Minister of Finance3.

b) resigns by notice in writing not exceeding thirty(30) days to the Minister of Finance in accordancewith the Act4;

c) ceases to be a Director by virtue of any provisionof the Act or becomes prohibited from being aDirector by any provision of law5.

2.2 Directors’ allowances and expenses 1) Directors shall be paid such allowances as may be

approved by the Minister of Finance6.

2) Directors may be paid all travelling, accommodationand other expenses as may be properly incurred bythem in connection with their attendance at meetingsor otherwise in connection with the discharge oftheir duties including their attendance at any event fororientation and training of Directors in connectionwith the discharge of their duties.

2.3 Powers of the Board of DirectorsThe Act places the responsibility on the Directors tomanage the business and affairs of the Corporationand confers the authority to the Board of Directorsto exercise all powers and do all acts which may bedone or exercised by the Corporation7.

PART 3 – MEETINGS OF THE BOARD

3.1 Frequency of MeetingsThe Board shall meet as often as may be required but notless than four (4) times a year as required under the Act8.

3.2 ChairpersonThe Chairperson shall preside at all meetings of theBoard and in his absence, the Directors presentshall elect a chairperson among the Directors withrelevant private sector experience and the person soelected shall preside and have all the powers of theChairperson9 for that meeting.

3.3 Calendar and Attendance at Meetings1) Meeting dates will be scheduled in advance so that

the Board has a calendar for the Corporation’sentire financial year, which will be reviewed andupdated regularly.

2) No Director shall be absent, except with leavegranted by the relevant person from two (2) of theBoard meetings in any period of twelve (12) months.The relevant person in the case of the Chairperson isthe Minister of Finance, and in the case of the rest ofthe Board members, the Chairperson10.

3.4 Calling of Meetings1) The Chairperson may call a meeting of the Board by

giving notice to all of the other Directors stating thetime and place of, and the business to be transactedat the meeting, or by causing the Corporate Secretaryto do so.

2) Subject to the other provisions of this By-law, noticesof meetings of the Board must be in writing. Noticesmay be given either personally or in writing includingwith the use of electronic communication to theaddress for the time being given to the Corporation.

3) Notices of regular meetings shall unless waived begiven no less than fourteen (14) days11 before the meeting.



3.18 Substitute for Corporate SecretaryWhere, due to absence or incapacity, the CorporateSecretary is unable to give or send a writtencommunication or other document required by thisBy-law, another officer, employee or Director selectedby the Chairperson may do so in his or her stead.

PART 4 – COMMITTEES OF THE BOARD

4.1 Audit Committee1) There shall be an Audit Committee comprising at

least three (3) members of the Board, of which two(2) must be non ex-officio Directors and one (1) mustbe an ex-officio Director, as named by the Board.

2) The Audit Committee shall be chaired by one of itsmembers, as selected by the Board, and such membershall be a person with financial expertise.

3) The Audit Committee will carry out such functions asare set out in its Board-approved Charter and anyincidental activities as the Committee or the Boarddeems necessary or appropriate.

4) The Committee will meet at the discretion of the chairbut not less frequently than four (4) times each year.

5) The Audit Committee will carry out the functions of theJawatankuasa Pengurusan Kewangan dan Akaun (“JPKA”).

6) The auditor of the Corporation shall be provided withnotice of meetings of the Audit Committee at the sametime and in the same manner as its members.

7) The presence of two (2) members constitutes aquorum for a meeting of the Audit Committee.

8) A matter put to a vote at a meeting of the AuditCommittee shall be decided by a majority of the votescast, and in the event of an equality of votes its chairhas a second vote.

4.2 Governance Committee1) There shall be a Governance Committee comprising

at least three (3) members of the Board, the membersof which shall be the Chairperson and one (1) nonex-officio Director and one (1) ex-officio Director, asnamed by the Board.

2) The Governance Committee shall be chaired by theChairperson of the Board.

3) The Governance Committee will carry out suchfunctions as are set out in its Board-approved Charterand any incidental activities as the Committee or theBoard deems necessary or appropriate.

4) The Committee will meet at the discretion of the chairbut not less frequently than two (2) times each year.

5) The presence of two (2) members constitutes aquorum for a meeting of the Governance Committee.

6) A matter put to a vote at a meeting of theGovernance Committee shall be decided by amajority of the votes cast. In the event of an equalityof votes its chair has a second vote.

4.3 Remuneration Committee1) There shall be a Remuneration Committee, the

members of which shall be two (2) non ex-officioDirectors and one (1) ex-officio Directors, as namedby the Board.

2) The Remuneration Committee shall be chaired byone of its members, as selected by the Board.

3) The Remuneration Committee will carry out suchadvisory or other functions on the subject of humanresource and compensation issues as are set out in its Board-approved Charter and any incidentalactivities as the Committee or the Board deemsnecessary or appropriate.

4) The Committee will meet at the discretion of the chairbut not less frequently than two (2) times each year.

5) The presence of two (2) members constitutes aquorum of the Remuneration Committee.

6) A matter put a vote at a meeting of the RemunerationCommittee shall be decided by a majority of the votescast. In the event of an equality of votes its chair hasa second vote.

CORPORATE BY-LAWS

Chairperson, requested for such authorisation17, andthe facilities are such that all persons participating inthe meeting can hear each other. Participating in ameeting pursuant to this provision shall constitutepresence in person (including for the purposes ofquorum) at such meeting.

3.13 Circular Resolutions in Writing A circular resolution in writing, signed by all theDirectors for the time being entitled to notice of ameeting of the Directors, shall be valid and effectualas if it had been passed at a meeting of the Directorsduly convened and held and any such resolution mayconsist of several documents in like form, each signedby one (1) or more Director18.

3.14 Declarations of Interest or Notices of Dissent 1) A written declaration of interest by a Director

respecting an actual or proposed material contractwith the Corporation or any other declaration of anactual, perceived or potential conflict of interest or awritten notice of dissent by a Director in respect of aresolution passed or other action taken at a meetingof the Board at which the Director was not presentshall be sufficiently made or given if provided to theCorporate Secretary.

2) If a Director makes a written declaration of interestor a Director who was not present at a meeting givesa written notice of dissent, a copy shall be sent to allof the other Directors by the Corporate Secretary assoon as practicable.

3) For avoidance of doubt where a conflict of interestarises or becomes known to the Director during ameeting of the Board or committee, it shall besufficient for that Director to declare the same at themeeting. Such conflict and the decision of the Boardor Committee in relation thereto shall be recorded inthe minutes of the meeting.

3.15 Coordination Through Chairperson The Chairperson is the principal channel ofcommunication for matters of significance concerningthe Corporation between individual Directors andthe Board or between the Board and the ChiefExecutive Officer.

3.16 Minutes of Meetings 1) The Corporate Secretary is the secretary of meetings

of the Board, but where he or she is not present at ameeting the Chairperson shall select another officer,employee or Director of the Corporation to be theacting secretary.

2) The Chairperson may require the CorporateSecretary to absent himself or herself from some orall of any particular meeting of the Board.

3) Minutes of the proceedings of the Board shall berecorded by the Corporate Secretary or any actingsecretary and maintained by the Corporate Secretary.

4) The Corporate Secretary shall send a draft of theminutes of each meeting of the Board to all of theDirectors before the time of the next meeting orwithin such greater or lesser period as theChairperson directs for the draft minutes of anyparticular meeting.

5) The Chairperson shall so confirm the minutes ofproceedings of the Board after they have beenapproved by the Board.

3.17 Manner of Sending Notices1) Any written communication or other document

required by this By-law to be given or sent shall besufficiently given or sent if dispatched by courierservice, mail or any electronic means of sendingmessages that is capable of producing a paper recordof the contents.

2) Items dispatched by courier service shall be deemedto arrive on the day of delivery, those sent byelectronic means shall be deemed to arrive on the dayof transmission and items mailed shall be deemed toarrive on the fifth day following the post-mark date.

3) Each Director shall provide the Corporate Secretaryfrom time to time with a current address to whichwritten communications and other documents can bedispatched to his or her attention.

4) A written communication or other documentdelivered or transmitted to the address most recentlyprovided by a Director shall be deemed received bythat Director.



CORPORATE BY-LAWS

178Perbadanan Insurans Deposit Malaysia


4.4 Other CommitteesThe Board may establish other Committees withsuch terms of reference or mandates, and withsuch membership from among Board members orother persons and for such duration as the Boardmay determine.

4.5 Terms of MembershipThe Board may set lengths of term for members ofCommittees named or selected by the Board.

4.6 Minutes of Meetings1) The Corporate Secretary is the secretary of meetings

of the Committees, but where he or she is notpresent at a meeting the chair of the Committee shallselect another officer, employee or Director to be theacting secretary.

2) The chair of a Committee may require the CorporateSecretary to absent himself or herself from some orall any particular meeting of the Committee.

3) Minutes of the proceedings of the Committees shallbe recorded by the Corporate Secretary or any actingsecretary and maintained by the Corporate Secretary.

4) Copies of the minutes of the proceedings of aCommittee shall be sent by the Corporate Secretaryto all of the Directors once they have been approvedby the Committee.

4.7 Application of General RulesExcept as modified by this Part, the provisions of this By-law relating to meetings of the Board apply tomeetings of Committees, being adapted to the case asnearly as practicable.

PART 5 – OFFICERS

5.1 Chief Executive Officer1) The Chief Executive Officer shall be appointed by the

Minister, on recommendation of the Board.

2) The Chief Executive Officer shall be responsible forthe day-to-day administration of the business andaffairs of the Corporation.

3) The Chief Executive Officer shall be answerable andaccountable to the Board for the exercise of hispowers and the performance of his duties.

4) In the absence or incapacity of the Chief ExecutiveOfficer, the Board may authorise an officer of theCorporation to perform the duties, functions andresponsibilities of the Chief Executive Officer.

5) The Chief Executive Officer shall be an officer of theCorporation subject to the terms and conditions ofservice determined by the Board and enjoy suchcompensation and other amenities as approved by theMinister upon recommendation of the Board.

5.2 Board-Appointed OfficersSubject to the Board establishing additional officerswith the Corporation that require Board appointment,the holders of the following offices must be appointedby the Board:

i) Chief Financial Officer,ii) General Counsel and Corporate Secretary.

5.3 Terms of Appointment1) An Officer appointed by the Board holds that office at

the pleasure of the Board and on terms and conditionsas may be determined by the Board19.

2) An individual may hold more than one office with theCorporation for an interim period to fill a vacancy untilthe vacant office is substantially filled.

5.4 Position DescriptionsThe Board shall approve general descriptions of therespective roles and responsibilities and authorities of:

i) The Chairperson,ii) The Chief Executive Officer, andiii) Those Officers who are appointed by the Board.

PART 6 – CONFLICT OF INTEREST

6.1 Conflicts of Interest1) Every Director, Officer and employee shall abide by

the applicable provisions of a conflicts of interest codeof the Corporation approved by the Board, bothduring and, to the extent therein provided, after his orher tenure with or employment by the Corporation20.


20 Section 12 of the Act provides that the Board may make such by-laws as may benecessary or expedient in relation to the Corporation including the conflictof interest in respect of serving directors, officers and employees of theCorporation and those directors, officers and employees who have left the serviceof the Corporation.

CORPORATE BY-LAWS


2) Directors shall disclose to any designated person or theBoard any conflict of interest that the Director may haveand is aware of.No Director may vote on a matter wherethe Director has a conflict of interest. Should a conflictof interest arise or come to his or her knowledge duringthe meeting, the Director shall immediately declare his orher conflict and leave the meeting until discussion on theitem in question is concluded.

3) Where a Director has disclosed to any designatedperson any conflict of interest or any interest ordirectorships or other positions it holds inaccordance with any policies or guidelines applicableto Directors that may give rise to a conflict ofinterest, the designated person may inform themeeting of the conflict of interest, whether actual,apparent or potential. If the meeting is not alreadyinformed of the actual, apparent or potential conflictof interest, the Director should then inform themeeting of such interest.

4) Where there is a potential, apparent or actual conflictof interest of any Director in relation to any matter tobe brought in the agenda of which the Chairperson isaware, the Chairperson may arrange to have anyDirector’s copy of any materials provided to the Boardfor the meeting expurgated as seems reasonablynecessary to prevent the Director receiving any non-public information bearing on the matter.

PART 7 – PROTECTION OF DIRECTORS ANDOFFICERS

7.1 Liability to be IndividualA present or former Director or officer or auditorshall not be liable to the Corporation, whether jointly,jointly and severally or otherwise, for any loss, damageor expense suffered or incurred by it as a result of anyneglect or default of any other present or formerDirector or officer or auditor.

7.2 IndemnificationSubject to the provisions of the law and providedhe or she has acted in good faith, each Director,officer or auditor of the Corporation shall be entitledto be indemnified against all costs, charges, losses,expenses and liabilities suffered and incurred by himor her in the execution of his or her duties or inrelation thereto.

7.3 Claims for Indemnification1) If a present or former Director, officer or auditor

claims indemnification against costs, charges andexpenses incurred in respect of an action or proceedingto which he or she is a party, the Corporation willpay the same on behalf of or reimburse the individualas and when incurred, or if so requested, make oneor more advances to the individual or for his or heraccount in order to pay such costs, charges andexpenses, provided that:

a) in the opinion of the Board, there is no substantialreason to doubt that the individual is entitled to beindemnified, and

b) the individual agrees that the Corporation shall beentitled to any costs, charges and expenses whichthe individual recovers from any other person.

2) The Corporation will have a policy setting out thecircumstances under which such individual if at allwould qualify for an advance or funding with regard tosuch costs, charges and expenses.

3) The benefits of this Part shall enure to the heirs,executors,administrators and legal personal representatives of apresent or former Director or Officer.

PART 8 – EXECUTION OF DOCUMENTS

8.1 AuthoritiesContracts for the purchase or other acquisition ofproperty or services, or for the disposition or supply ofproperty or services, by the Corporation, guarantees,indemnities and similar commitments by the Corporation,cheques and other negotiable or non-negotiable ordersfor payment issued or received by the Corporationand promissory notes, bonds, debentures and othernegotiable or non-negotiable promises of payment madeor received by the Corporation may be signed orendorsed on behalf of the Corporation in accordancewith resolutions of the Board21.

21 Section 6 of the Act provides that any document or instrument which, if executed by any person not being a body corporate, would not be required to be under seal may in alike manner be executed by the Corporation, and any such document or instrument may be executed on behalf of the Corporation by any officer of the Corporation generallyor specifically authorised by the Board in that behalf.

CORPORATE BY-LAWS



POLICY FOR DISCLOSURE OFINFORMATION CONCERNING

WRONGDOING IN THE WORKPLACE

I) INTRODUCTION

1. Whistleblowing is basically a form of disclosure. Itinvolves a person i.e. the whistleblower raising seriousconcerns at an early stage about risks of wrongfulactivities or reporting a wrongdoing.

2. The whistleblower usually works in or with theorganisation and has knowledge of the underpinningfacts and circumstances surrounding a wrongdoingwithin that organisation.

3 . The Corporat ion recognises that hav ing awhistleblowing system contributes to a more efficientand effective organisation.

4. This whistleblowing policy (hereinafter referred to as“this Policy”) is intended to enable employees and otherpersons to make disclosures about wrongdoings at anearly stage to a designated person in the Corporationwithout fear of reprisal so that problems can beidentified and resolved quickly within the Corporation.

5. At the same time, this Policy is to also ensure peopleexercise their right (to make a disclosure) responsiblyand sensibly when suspecting something amiss.

6. The development of this Policy is guided by thefollowing principles:

6.1 The Corporation is committed to the values oftransparency, integrity, impartiality and accountabilityin the conduct of its business and affairs. It expectswrongdoings such as fraud, corruption, seriousfinancial impropriety and gross mismanagementto be reported and facilitates this throughinternal mechanisms.

6.2 A whistleblowing policy reflects the Corporation’sphilosophy to stand ready at all times. It coversdisclosures about risks that a wrongdoing is likelyto happen. Such disclosures act like an earlywarning system to identify problems or pre-empta situation detrimental to the Corporation. It alsomakes the Corporation better prepared to managerisks and contingencies including how to avoidsimilar problems in future or prevent similarwrongdoings from recurring.

6.3 The Corporation promotes an open communicationand honest work culture by setting up internal

procedures to address concerns. This Policycomplements the normal channels of communicationand reporting lines within the Corporation. Itprovides an alternative route for employees toraise concerns if the usual lines of communicationare not available as the complaint relates to his orher immediate supervisor or head of division.

6.4 The Corporation encourages its employees toaspire to achieve the highest possible legal andethical standards. This Policy demonstrates theCorporation’s and its employees’ commitment tohigh legal and ethical standards. Integratingwhistleblowing policies into our practices andculture helps to deter fraud, corruption andmismanagement . Through an e f fec t i veimplementation of this Policy, the Corporation isable to preserve its integrity and stand up topublic scrutiny. This in turn enhances and buildscredibility with our stakeholders.

7. The purpose and objectives of this Policy areas follows:

7.1 To facilitate the making of a disclosure as early aspossible and in a responsible manner by puttinginto place internal procedures.

7.2 To address a disclosure in an appropriate and timelymanner. When disclosure matters are addressed,they may be prioritised according to the nature orgravity of the alleged wrongdoings or reported risksand the magnitude of the repercussions.

7.3 To protect a whistleblower from reprisal as adirect consequence of making a disclosure and tosafeguard such person’s confidentiality.

7.4 To treat both the whistleblower and the allegedwrongdoer fairly. The whistleblower will beinformed of the status of his or her disclosure.The alleged wrongdoer will be informed of theallegations (though not necessarily at the start ofthe investigation) and given an opportunity toanswer the allegations.The identities and personalinformation of the whistleblower and the allegedwrongdoer will be revealed to persons involvedin investigations or any other processes on a“need to know” basis only.

8.2 Signatures by Proxy1) If the occasion requires, the Chairperson may designate

another Director or the Chief Executive Officer to signa document or instrument in his or her name.

2) If the occasion requires, the Chief Executive Officer maydesignate another employee to sign a document orinstrument in his or her name.

8.3 Facsimile SignaturesThe signature of an individual on a document orinstrument to be signed on behalf of the Corporationmay be affixed manually or printed, stamped, engraved,lithographed or otherwise mechanically reproduced22.

8.4 Common and Facsimile Seal1) The common and facsimile seal shall be used with the

authority of the Board and in accordance with anyresolution and policy of the Board from time to time inforce and every instrument to which the common sealis affixed shall be signed by a Director and shall becountersigned by the secretary or by a second Directoror such other person as appointed by the Board23.

2) The Corporation may have a facsimile seal and thesignature of any Director or secretary may be affixedmanually or printed, stamped, engraved, lithographed orotherwise mechanically reproduced24.

3) Every instrument to which a facsimile seal is affixed andsigned by a Director and secretary by printing or othermechanical means shall have the same force and validityas if the common seal had been affixed and suchinstrument properly signed.

4) The common and facsimile seal shall be kept inaccordance with the provisions of the Act25.

5) The seal, an impression of which appears as the Scheduleto this By-law is the common seal of the Corporation.

PART 9 – ACCOUNTS AND AUDIT

9.1 Accounts and Audit1) The Directors shall cause accounting records to be kept

in accordance with the Act26.

2) The accounts of the Corporation shall be audited by theAuditor General27.

3) The Directors shall, in accordance with the Act, cause tobe prepared and transmitted to the Minister of Financesuch annual accounts and annual reports as are requiredby the Act to be so prepared and transmitted28, fortabling by the Minister of Finance at the Dewan Rakyatand Dewan Negara.

PART 10 – REVIEW OF BY-LAW

10.1 Annual Review1) The Chief Executive Officer shall undertake a review of

this By-law, or cause the General Counsel and theCorporate Secretary to do so, annually, and shall reportto the Chairperson any suggested changes.

2) Any such report shall be tabled before the Board,accompanied by any recommendations of the Chairperson.

SCHEDULE

Common SealThe seal, an impression of which appears below, is thecommon seal of the Corporation.

[ Seal ]

22 Subsection 5(2) of the Act provides that the Board may provide for a facsimile seal and may authorise the signature of any director or secretary be produced by printingor other mechanical means.


24 Subsection 5(2) of the Act provides that the Board may provide for a facsimile seal and may authorise the signature of any director or secretary be produced by printingor other mechanical means.

25 Section 5(6) of the Act.

26 Section 33 of the Act which cross-refers to the Statutory Bodies (Accounts and Annual Reports) Act 1980.


28 Section 35 of the Act requires the Corporation, within three (3) months from the close of its financial year transmit a copy of the annual accounts certified by theAuditor-General and an annual report on the working of the Corporation throughout the year to the Minister, who shall, as soon as possible, cause them to be laidbefore the Dewan Negara and the Dewan Rakyat.

CORPORATE BY-LAWS



2.4 matters pending or determined through anytribunal or authority or court, arbitration or othersimilar proceedings.

3. A Wrongdoing could occur in the course of theCorporation’s business or affairs or at any workplacei.e. any place related to the Corporation’s business oraffairs, for example, on the Corporation’s premises,at a charity event organised by the Corporation, orduring a conference attended by its employee in thecourse of his or her work.

4. If an employee is unsure whether a particular act oromission constitutes a Wrongdoing under this Policy,he or she is encouraged to seek advice or guidancefrom his or her supervisor or head of division, or thehead of Human Capital Division or, where necessary,the CEO.

C. WHEN TO DISCLOSE

1. A Whistleblower should come forward with anyinformation or document that he or she, in good faith,reasonably believes discloses a Wrongdoing is likely tohappen, is being committed or has been committed.

2. The Whistleblower needs to demonstrate that he orshe has reasonable grounds for the concerns.However, he or she is not expected to first obtainsubstantial evidence of proof beyond reasonabledoubt when making a Disclosure. If he or she knowsas a matter of fact that there are serious risks that aWrongdoing is going to take place, such genuineconcerns should be raised at that early stage.

3. Disclosure should be made within three (3) months of coming upon such information or document.Delaying the Disclosure may be detrimental to the Whistleblower as well as any investigation, andmakes it harder for the Corporation to address andresolve the concerns.

4. If a Whistleblower was or is involved in a Wrongdoing,he or she is encouraged to make a Disclosure and thevoluntary admission will be given due consideration.The protection provided by this Policy may notapply depending on the nature or gravity of theWhistleblower’s involvement or the Wrongdoing.

D. HOW TO PROCEED

1. Generally, all Disclosures pursuant to this Policy areto be made to the Prescribed Officer except in thecircumstances specified below.The Prescribed Officeris currently the General Counsel.

Initial Disclosure

2. A Disclosure can be made in writing or orally.

3. The Prescribed Officer will commit to writing aDisclosure made verbally and the Whistleblower is toconfirm the written statements. As far as reasonablypracticable, such Disclosure will be made in a privateroom within the Corporation’s office.

4. A Disclosure shall include at least the followingparticulars:

4.1 a) if the Whistleblower is an employee of theCorporation, his or her name, designation,current address and contact numbers; or

b) if the Whistleblower is not an employee of the Corporation, his or her name, name ofemployer and designation, current addressand contact numbers;

4.2 basis or reasons for his or her concerns includingas many details of the Wrongdoing as reasonablypossible, for example, its nature, the date, timeand place of its occurrence and the identity ofthe alleged wrongdoer;

4.3 particulars of witnesses, if any; and

4.4 particulars or production of documentary evidence,if any.

5. The Whistleblower may be asked to provide furtherclarifications and information from time to time, forexample, if an investigation is conducted.

Screening

6. The Prescribed Officer will screen and assess theDisclosure to determine whether it is related to aWrongdoing or excluded from the scope of thisPolicy, and will prepare general recommendations tothe deciding authority. This initial process should not



II) MONITORING AND REVIEW

1. In general, all disclosures pursuant to this Policy areto be made to the Prescribed Officer who is an officerof the Corporation designated by the Chief ExecutiveOfficer (“CEO”) from time to time.

2. The Prescribed Officer is responsible for ensuringcompliance with this Policy and will prepare annualreports for the Board of Directors (“Board”).

3. The Board will be apprised of disclosure matterswhich are serious in nature or of grave repercussions.

4. This Policy may be reviewed and amended from timeto time, as and when necessary, to ensure itsrelevance and effectiveness in keeping with theCorporation’s changing business environment oradministrative or operational needs.

III) PROCEDURES

PRELUDE

This Policy is intended to complement the normalchannels of communication and reporting lines within theCorporation. Employees should first consult or raise theirconcerns with their immediate supervisors or heads ofdivisions, or the head of the Human Capital Division or,where necessary, the CEO. However, if their complaintsrelate to such persons or if their concerns remainunresolved, this Policy provides a facility for employees tomake formal disclosures.

A. WHO CAN DISCLOSE

1. Any of the following people (“Whistleblower”) canmake a disclosure:

• The Corporation’s employees including employeeson contract terms, temporary or short-termemployees and employees on secondment.

• People performing services for the Corporationincluding contractors and consultants (“Servicers”).

• Members of the public who are natural persons,not being incorporated or unincorporated bodies.

B. WHAT TO DISCLOSE

1. A disclosure (“Disclosure”) may be made if it relatesto one or more of the following wrongdoings by anyperson in the conduct of the Corporation’s businessor affairs (“Wrongdoing”):

• Corruption or fraud.

• Criminal offence.

• Misuse of the Corporation’s funds or assets.

• Gross mismanagement within the Corporation.

• Serious financial irregularity or impropriety withinthe Corporation.

• Serious breach of the Corporation’s Code OfBusiness Conduct And Ethics or Conflict OfInterest Code for its employees and directors.

• An act or omission which creates a substantialand specific danger to the lives, health or safetyof the Corporation’s employees or the public orthe environment.

• Failure to comply with the provisions of theMalaysia Deposit Insurance Act 2005.

• Failure to comply with the provisions of the otherActs of Parliament where the wrongdoer,knowingly, disregards or does not comply withsuch provisions.

• Knowingly directing or advising a person tocommit any of the above Wrongdoings.

2. This Policy excludes any issues, complaints orconcerns about:

2.1 matters which are trivial or frivolous ormalicious or vexatious in nature or motivated bypersonal agenda or ill will;

2.2 matters covered by the Corporation’s EmployeeGrievance Procedures;

2.3 matters pending or determined through theCorporation’s disciplinary proceedings; and




take more than one (1) month from the day thePrescribed Officer receives the Disclosure. It may becompleted immediately if the Wrongdoing is capableof causing irreparable harm to the Corporation.

7. A Disclosure can be made directly to the CEO ineither of the following circumstances:

7.1 where the Wrongdoing involves the PrescribedOfficer; or

7.2 where the Wrongdoing does not involve thePrescribed Officer but the Whistleblower, ingood faith, reasonably believes that there willbe a cover-up or that the Prescribed Officeris personally conflicted (for example, thePrescribed Officer is a close friend of thealleged wrongdoer).

7.3 In either circumstance, there will be no referralto a higher authority.The CEO has the authorityto make final decisions including but not limitedto any of those mentioned under paragraph 8below. The CEO may designate any persons,other than the Prescribed Officer, from withinor without the Corporation to conduct anyinvestigation or to carry out any other processpursuant to this Policy (for example, any meetingor an internal audit).

Referral To Deciding Authority

8. Following paragraph 6 above, the Disclosure togetherwith the general recommendations will be referred bythe Prescribed Officer to the CEO who has theauthority to make final decisions including but notlimited to any of the following:

• Rejection of the Disclosure.

• Directing the concerns or any part thereof forconsideration under other internal procedures,such as the Employee Grievance Procedures or thedisciplinary procedures, if appropriate and applicable.

• Resolution without recourse to an investigation.

• Directing investigations of the Disclosure and anypersons involved or implicated.

• Suspending the alleged wrongdoer or any otherimplicated persons from work to facilitate any fact-finding or to avoid any employee’s exposure to athreat or harm.

• Designating the Prescribed Officer or any otherpersons from within or without the Corporationto conduct any investigation or to carry out anyother process pursuant to this Policy (for example,any meeting or an internal audit).

• Obtaining any other assistance (for example,external auditors or legal advice).

• Referral to the police or any other appropriateenforcement authority.

9. If the Disclosure involves the CEO, followingparagraph 6 above, the Disclosure will be referreddirectly to the Chairperson of the RemunerationCommittee who will then be responsible for theinvestigation and recommendation to the Board. TheChairperson of the Remuneration Committee mayrefer the Disclosure to the Chairperson of the AuditCommittee if the Wrongdoing comes within thepurview of the Audit Committee (for example, theWrongdoing is financial in nature e.g. fraud). In thelatter event, the Chairperson of the Audit Committeeis responsible for the investigation and recommendationto the Board. In either case, the Board has theauthority to make final decisions and, if applicable,make a recommendation to the Minister of Financefor the removal of the CEO.

10. If the Disclosure involves a Director of theCorporation (except the Chairperson of the Board),following paragraph 6 above, the Disclosure will bereferred directly to the Chairperson of the Boardwho will then be responsible for the investigation andrecommendation to the Board. A Disclosure involvingthe Chairperson of the Board is to be referred to theChairperson of the Audit Committee who will thenbe responsible for the investigation and recommendationto the Board. In either case, the Board has theauthority to make final decisions and, if applicable,make a recommendation to the Minister of Financefor the removal of the Director concerned.



Being Informed, Opportunity To Be Heard

11. The Whistleblower will be informed of the status of hisor her Disclosure matter as far as reasonably practicable.

12. The Whistleblower and the alleged wrongdoer areexpected to give his or her full cooperation in anyinvestigation or any other process carried outpursuant to this Policy.

13. The alleged wrongdoer may be asked to attend ameeting to discuss the allegations (“Meeting”) andmust take all reasonable steps to attend the Meeting.He or she will be given an opportunity to answer theallegations at the Meeting, and his or her answers willbe recorded in the minutes of the Meeting. TheMeeting may be adjourned for the Corporation to getany advice or make any further investigation. AMeeting may not necessarily be held within the earlystages of an investigation.

14. In the event the Whistleblower is implicated ordiscovered to be or have been involved in anyWrongdoing, he or she may also be investigated so asto complete the fact-finding process. An investigationis not and shall not be treated as a reprisal against theWhistleblower. It is to facilitate decision-making. TheWhistleblower may then be asked to attend a meetingto discuss the allegations and must take all reasonablesteps to attend that meeting. He or she will be givenan opportunity to answer the allegations at thatmeeting, and his or her answers will be recorded inthe minutes of that meeting. That meeting may beadjourned for the Corporation to get any advice ormake any further investigation.

15. The Whistleblower and, if applicable, the allegedwrongdoer will be notified in writing of the decisionon the Wrongdoing (e.g. the Wrongdoing occurred ornot; the alleged wrongdoer is guilty or not), and thebasis thereof.

Consequence Of Wrongdoing Or WrongfulDisclosure

16. If an employee of the Corporation has, or is foundto have:

a) committed a Wrongdoing;

b) taken serious risks which would likely cause aWrongdoing to be committed;

c) made a disclosure not in accordance with therequirements of this Policy (for example, dishonest,mischievous or malicious complaints); or

d) participated or assisted in any process pursuant tothis Policy otherwise than in good faith,

The corrective actions to be taken against that employeewill be determined by the CEO or, if so delegated by theCEO, the Management, which may include disciplinarymeasures, formal warning or reprimand, demotion,suspension or termination of employment or services withthe Corporation or monetary or other form of punishment.

E. PROTECTION

1. Upon making a disclosure in good faith, based onreasonable grounds and in accordance with theprocedures pursuant to this Policy:

1.1 The Whistleblower will be protected from areprisal within the Corporation as a directconsequence of his or her disclosure; and

1.2 The Whistleblower’s identity will be protectedi.e. kept confidential unless otherwise requiredby law or for purposes of any proceedings by oragainst the Corporation.

2. The identities and personal information of theWhistleblower and the alleged wrongdoer may berevealed to persons involved in investigations or anyother processes on a “need to know” basis.

3. A reprisal means disciplinary measures, demotion,suspension or termination of employment or serviceswith the Corporation or a threat to do any ofthese actions.

4. a) If an employee of the Corporation, in good faith,reasonably believes he or she is being subjectedto harassment, victimisation or a reprisal as adirect consequence of having made a disclosureunder this Policy, he or she (“Complainant”) mayconsult the Prescribed Officer in confidence.Essentially, the complaint will be processed in asimilar manner as a whistleblowing disclosureabove and is subject to similar requirements.

b) The wrongdoing being addressed in this instance isthe retaliatory conduct or action complained of.







c) i) if an employee of the Corporation is foundguilty of the wrongdoing i.e. harassment,victimisation or reprisal complained of; or

ii) if the complaint was made by the Complainantotherwise than in good faith and based onreasonable grounds,

the CEO or, if so delegated by the CEO, theManagement will determine the action to betaken which may include disciplinary measures,formal warning or reprimand, demotion,suspension or termination of employment orservices with the Corporation or monetary orother form of punishment.

5. Any aspects and elements relating to employeeprotection and employer-employee rights, benefitsand obligations do not apply to Servicers andmembers of the public.

6. Any employees of the Corporation, Servicers ormembers of the public who made, or arediscovered to have made, a disclosure otherwisethan in good faith and based on reasonable groundswill automatically lose the above protections(where applicable).

IV) QUICK CHECKLIST FOR AWOULD-BE WHISTLEBLOWER

Do

• Promptly make a note of concerns anddocumentary evidence;

• Disclose responsibly and in good faith – thinkof the consequences before acting;

• Follow this Policy and consult the appropriate officer.

Don’t

• Be afraid to raise genuine concerns;

• Accuse any individuals directly;

• Use this Policy because of ill will or personal agenda.

CORPORATE OBJECTIVES KEY PERFORMANCE INDICATORS TARGET2007 2008 2009

The Corporate Scorecard shown below incorporates selected Key Performance Indicators to ensure that our initiatives are met within specified timelines and within set targets.

1. Board assessment on:a. Best practices of governance adoptedb. Management practices adoptedc. Compliance with significant policiesd.Timeliness and relevance of information and quality of recommendation provided by Management for

the Board to make informed decisions and fulfill responsibilities

2. Engagement and responsiveness to other stakeholders' needs

4. Public awareness index

5. Successful completion of key initiatives:a. Implementation of an Integrated Communications Plan

i. Implementation of advertising programmesii. Implementation of public relations programmes

b. Implementation of ongoing stakeholders' engagement programmes:i. Conduct of Deposit Insurance briefings, seminars and roadshows

6. PIDM’s relationship with:a. Bank Negara Malaysiab. Member Institutions c. Suppliersd. International Deposit Insurers

9. Actual vs.Approved Budgets4 Optimal use of resources

3 Effective partnerships

2 Educated and informed stakeholders

1 Well governed and well managed organisation High satisfaction

High satisfaction100%

High satisfaction

High satisfactionHigh satisfaction

100%High satisfaction

High satisfactionHigh satisfaction

100%High satisfaction

Develop mechanism and establish baseline

Action on assessmentand feedback received


Review

Complete

CompleteCompleteComplete

CompleteComplete

Review

30% 40% 50%

ImplementImplement

Implement

ImplementImplement

Implement

ImplementImplement

Implement

StrongSatisfactory

StrongStrong

StrongSatisfactory

StrongStrong

StrongSatisfactory

StrongStrong



Develop mechanism and establish baseline

DevelopComplete

Develop Complete

Complete

±10% variance ±10% variance ±10% variance

ReviewImplement

ReviewDevelop

Implement10. Successful completion of key initiatives:

a. Implementation of an ALCO frameworkb. Development and implementation of a Provisioning/Deposit Insurance Funding framework

8. Successful completion of key initiatives:i. Establishment of a base of strategic partnersii. Hosting of IADI 6th Annual Conferenceiii. Hosting of IADI Asian Regional Committee

3. Successful completion of key initiatives:a. Development of a Crisis Communication Management planb. Development and implementation of an Enterprise Risk Management framework:

i. Introduction and buy-in programmeii. Development of an Enterprise Risk Management foundation and governance processiii. Initial high level risk identification and assessmentiv. Ongoing risk assessment and review

c. Development and implementation of an Internal Control frameworkd. Development of a Succession Management framework for the Board

7. International recognition

ST

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FIN

AN

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186

CORPORATE SCORECARD


INT

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CORPORATE OBJECTIVES KEY PERFORMANCE INDICATORSTARGET

2007 2008 200911. Internal Control compliance

13. Successful completion of key initiatives:a. Development and assessment of employees’ competency:

i. Development and assessment of competency gap analysisii. Development and assessment of specific training need analysisiii. Development of annual Training Plan for individuals

b. Development and implementation of a Succession Management framework

15. Successful completion of key initiatives:a. Development and implementation of Recognition and Reward programmes

14. Employee satisfaction index

Complete framework Strong Strong

CompleteCompleteCompleteDevelop

Outcome KPICompleteCompleteImplement

Outcome KPICompleteComplete

CompleteDevelop

Complete

Complete

CompleteComplete

CompleteComplete


Complete

Complete

CompleteImplementDevelop

Complete

Complete


CompleteCompleteImplement

Implement

Complete

Review

75% 80% 85%

Implement Implement Implement

5 Operational excellence

6 Competent andknowledgeable workforce

7 Conducive corporateenvironment

12. Successful completion of key initiatives:a. Development and implementation of Differential Premium Systems:

i. Issuance of a consultation paper on Differential Premium Systemsii. Development of Differential Premium Systems Regulationsiii. Implementation of a Differential Premium Systems frameworkiv. Development and implementation of Differential Premium Systems IT infrastructure

b. Development and implementation of comprehensive Risk Assessment and Monitoring frameworks:i. Phase 1 - Basic infrastructureii. Phase 2 - Enhancement

c. Development of comprehensive Intervention and Resolution frameworks:i. Phase 1 - Research and development of scope of frameworkii. Phase 2 - Development of specific resolution methodology, policy, process and criteriaiii. Phase 3 - Development of comprehensive intervention and resolution frameworks

d. Development of Deposit Insurance policies and regulations:i. Terms and Conditions of Membership Regulations:

• Issuance of a consultation paper• Development of draft regulations

ii. Information Regulations:• Issuance of a consultation paper• Development of draft regulations

iii. Criteria for Insurability of Conventional and Islamic Deposit Products Regulations:• Development of a concept paper• Issuance of a consultation paper• Development of draft regulations

iv. Interest Payable and Return on Deposits Regulations:• Development of a concept paper• Issuance of a consultation paper• Development of draft regulations

e. Implementation of the IT infrastructure enhancement plan:i. Phase 2 - IT infrastructureii. Phase 3 - IT operational systemiii. Phase 4 - Technology Enhancement and User Empowerment

f. Development and implementation of a Quality Assurance frameworkg. Development and implementation of the plan for relocation to new work premise

CORPORATE SCORECARD

GLOSSARY OF TERMS

ADVERSE SELECTION

The tendency for higher-risk banks to opt for depositinsurance and lower-risk banks to opt-out of depositinsurance when membership in a deposit insurance systemis voluntary.

BASEL CAPITAL ADEQUACY FRAMEWORK

A framework established by the Basel Committee onBanking Supervision that sets out minimum capitaladequacy standards for banks with the objective toimprove the soundness of financial systems. The firstframework was called Basel I.

BASEL II

The Basel II Framework describes a more comprehensivemeasure and minimum standard for capital adequacy thatnational supervisory authorities are now working toimplement through domestic rule-making and adoptionprocedures. It seeks to improve on the existing rules byaligning regulatory capital requirements more closely tothe underlying risks that banks face. In addition, the Basel IIFramework is intended to promote a more forward-lookingapproach to capital supervision, one that encouragesbanks to identify the risks they may face, at present and inthe future, and to develop or improve their ability tomanage those risks. As a result, it is intended to be moreflexible and better able to evolve with advances in marketsand risk management practices.

BENCHMARK

A standard or guideline to which other items or processescan be compared.

BLANKET GUARANTEE

A declaration by the government that all deposits andperhaps other financial instruments will be protected.

COINSURANCE

An arrangement whereby depositors are insured for a pre-specified portion, less than 100% of their deposits.

COLLATERALISATION

The taking of a mortgage, pledge, charge or other form ofsecurity by a creditor over one or more assets of a debtor.

CONVENTIONAL DEPOSIT INSURANCE FUND

All premiums received by PIDM and interests earnedminus the direct cost of operating conventionaldeposit insurance system.

DEPOSITOR PRIORITY

The granting of preferential treatment to depositors suchthat their claims must be paid in full before remainingcreditors can collect on their claims.

DIFFERENTIAL PREMIUM/RISK ADJUSTEDDIFFERENTIAL PREMIUM

A levy on a bank assessed on the basis of that bank’srisk profile.

ENTERPRISE RISK MANAGEMENT

The framework applied on an organisation-wide basis toensure and demonstrate that an entity’s significant risks arebeing consistently and continuously identified, assessed,managed, monitored and reported on.

EX-ANTE FUNDING

The accumulation of a fund to cover deposit insuranceclaims in anticipation of the failure of a member bank.

EX-POST FUNDING

An assessment levied after the failure of a member bank toprovide funds to cover deposit insurance claims.

FAILURE RESOLUTION METHOD

This is a general term to refer to commonly acceptedapproaches undertaken by regulators and deposit insurers toresolve an ailing, failing or insolvent bank.



PURCHASE-AND-ASSUMPTIONTRANSACTION (SALES)

A resolution method in which a healthy bank or group ofinvestors assume some or all of the obligations, and purchasesome or all of the assets of the failed bank.

RECEIVER

The legal entity that undertakes the winding down of theaffairs of an insolvent bank.

REGULATORY DISCIPLINE

Governs the establishment of new banks; qualifications ofdirectors and managers; business activities; change ofcontrol; and standards for risk management, internalcontrols and external audits.

TOTAL INSURED DEPOSITS

The sum of deposits insured by PIDM, held by a memberinstitution, which would be paid out by PIDM in the eventthat member fails.

SET-OFF

Refers to situations where the claim of a creditor in aninsolvent bank (for example, a deposit) is deducted from aclaim of the bank against the creditor (for example, a loan).

SITUATIONAL ANALYSIS

An examination that policymakers undertake to assessfactors such as: the state of the economy; current monetaryand fiscal policies; the state and structure of the bankingsystem; public attitudes and expectations; the state of thelegal, prudential regulatory and supervisory; accounting anddisclosure regimes.

SUPERVISORY DISCIPLINE

Requires that banks are monitored for safety and soundnessas wel l as compl iance issues and that correct iveactions are taken promptly, including the closure of a bankwhen necessary.

FINANCIAL SAFETY NET

Usually comprises the deposit insurance function,prudential regulation and supervision, and the lender-of-last-resort function.

FOREIGN BANK

A foreign-bank subsidiary is incorporated as a separateentity in the host country. A foreign-bank branch, on theother hand, is an extension of the foreign bank itself intoa host country. Foreign-bank branches and subsidiaries maybe subject to different rules and supervised differently bya host country.

INSURED DEPOSITS

Insured deposits are all eligible deposits that are insuredunder the Malaysia Deposit Insurance Corporation Act2005. Eligible deposits include current, savings, fixedand investment deposits, payment instructions drawn ormade against a deposit account and any other financialinstruments as may be specified by PIDM from time to time.


All premiums received by PIDM and returns made minus thedirect cost of operating an Islamic deposit insurance system.

LEAST-COST RESOLUTION

A procedure that requires the deposit insurer or otherdesignated entity to implement the resolution alternativethat is determined to be less costly to the system than allother resolution alternatives, including the liquidation of thefailed bank.

LIMITED-COVERAGE DEPOSIT INSURANCE

A guarantee that the principal and the interest accruedon protected deposit accounts will be paid up to aspecified limit.

MANDATE

A mandate is a set of official instructions or statement ofpurpose of a Corporation.

MARKET DISCIPLINE

A situation where depositors or creditors assess the riskcharacteristics of a bank and act upon such assessments todeposit or withdraw funds from a bank.

MEMBER INSTITUTIONS

Member institutions are all commercial banks (includingforeign banks operating in Malaysia) and finance companieslicensed under the Banking and Financial Institutions Act1989 and all Islamic banks licensed under the Islamic BankingAct 1983. Membership is compulsory under the MalaysiaDeposit Insurance Corporation Act 2005.

MORAL HAZARD

The incentive for additional risk taking that is often presentin insurance contracts and arises from the fact that partiesto the contract are protected against loss.

NETTING/NETTING ARRANGEMENTS

This refers to the reduction of an account holder’s insureddeposits by the amount of outstanding loans in a failedinstitution or the reduction of an account holder'soutstanding loans by the amount of deposits above thecoverage limit.

OPEN-BANK ASSISTANCE

A resolution method in which an insured bank in danger offailing receives assistance in the form of a direct loan, anassisted merger, or a purchase of assets.

GLOSSARY OF TERMS GLOSSARY OF TERMS

191 192

13. Do joint accounts and trust accountsenjoy separate deposit insurancecoverage?Yes. Joint accounts and trust accounts enjoy separatedeposit insurance coverage limit each, provided therecords of the member institution disclose the namesof the joint or trust account holders and theirindividual interests in the deposit.

14. Are repurchase agreements, moneymarket placements and unit trustseligible for deposit insurance?No. Repurchase agreements, money market placementsand unit trusts are not eligible for deposit insurance.

15. Are there other accounts that are separately insured?Yes. Deposits held under a sole proprietorship or apartnership or held by a depositor who carries on anyprofessional practice are separately insured, providedsuch information has been disclosed on the recordsof the member institution.

16. If I have deposits in several memberinstitutions, will all my deposits beadded up for deposit insurance purposes?No. Deposits in different member institutionsare insured separately. The RM60,000 coveragelimit is applicable per depositor per member institution.

17. If I have deposits in different branchesof the same member institution,will all my deposits be insured separately?No. Deposits held in different branches of the samemember institution will be added together for depositinsurance purposes.

18. What happens to my deposit if twomember institutions merge?You will continue to be separately insured for aperiod of two years or upon maturity or untilwithdrawal, whichever is earlier.

19. Are deposits made by a non-resident ofMalaysia insured? Your place of residence or nationality doesn’t affectdeposit insurance coverage. Deposits placed with amember institution of PIDM will be covered up toRM60,000 per depositor per member institution.

20. How can I maximise coverage for mydeposits in a single bank?The RM60,000 limit is for each separate legalownership of the deposit account. If the ownershipof several accounts is different from one another,deposit insurance coverage would be givenseparately for each account. For example, if you holdan individual account, three joint accounts withdifferent individuals, be part of a partnership orprofessional practise account, you will enjoy separatecoverage of up to RM60,000 for all the five accountstotalling up to RM300,000.

21. If that is so, why did PIDM decide oncoverage of up to RM60,000 per eligibledeposit account? The current coverage limit was set based on statisticsshowing 95% of deposits will already be protected infull. Under current rules, almost all depositors areprotected by deposit insurance.

22. How do I make a claim?In the unlikely event a member institution is not ableto meet its obligations, you don’t have to make anyclaim. PIDM will announce how, where and when youwill be paid up to your insured amount. PIDM will betransparent and pay you speedily.

23. Does it mean our financial institutionsare no longer supervised by Bank NegaraMalaysia (BNM)?No. BNM remains the primary supervisor andregulator of the financial system. It continues to beresponsible for maintaining the stability of thefinancial system. PIDM complements BNM’s role andcontributes to stability of the system by managing thisdeposit insurance system in a manner that encouragesprudent risk management in member institutions.


FREQUENTLY ASKED QUESTIONS FREQUENTLY ASKED QUESTIONS

1. What is Deposit Insurance?Deposit Insurance is a system established by theGovernment to protect depositors against the loss oftheir insured deposits placed with member institutions inthe unlikely event a member institution is unable to meetits obligations to depositors.This system was launched inMalaysia on 1 September 2005.

2. What is Perbadanan Insurans DepositMalaysia (PIDM) or Malaysia DepositInsurance Corporation (MDIC)?We are an independent statutory body that providesprotection for depositors in the remote event a memberinstitution is unable to repay its depositors holding insureddeposits.Within the country,we wish to be known as PIDMbeing short for Perbadanan Insurans Deposit Malaysia.

3. What is the role of PIDM or MDIC? PIDM or MDIC’s role is to administer a depositinsurance system and protect depositors. PIDMprovides incentives for sound risk management in the financial system, and promotes and contributesto the stability of the financial system.

4. How does PIDM contribute to thestability of the financial system?PIDM reinforces and complements the existingregulatory and supervisory framework by promotingincentives for financial institutions to implementsound risk management practices. We contribute tothe stability of the financial system by dealing with anyindividual non-viable bank expeditiously therebypreventing it from affecting other banks or thebanking system. In carrying out our mandate, PIDMis empowered to acquire assets from memberinstitutions, make loans or advances with or withoutsecurity, acquire shares of member institutions andtake all other necessary measures.

5. Who are member institutions? Member institutions are all commercial banks (includingforeign banks operating in Malaysia) and finance companieslicensed under the Banking and Financial Institutions Act1989 and all Islamic banks licensed under the IslamicBanking Act 1983. Membership is compulsory as provided

under the Malaysia Deposit Insurance Corporation Act2005 (MDIC Act). A list of member institutions can beobtained either by contacting PIDM at 1-800-88-1266or by accessing PIDM's website at www.pidm.gov.my

6. Must I apply for deposit insurancecoverage? No, you don’t need to. Eligible deposit accounts areautomatically insured at no charge to you.

7. Who pays for the insurance premium?Your member institution is required to pay annualpremiums to the deposit insurance systemadministered by PIDM.

8. What is the deposit insurance coveragelimit?PIDM insures eligible deposits up to RM60,000 perdepositor per member institution. The RM60,000 limitincludes both the principal amount of a deposit and theinterest/return.

9. Can I buy additional insurance for mydeposits if it is more than RM60,000? No. Deposit insurance is not a general or lifeinsurance product. It is provided by the Governmentthrough the MDIC Act and administered by PIDM.

10. What types of deposits are eligible fordeposit insurance? Current and savings deposit accounts, fixed deposits,investment deposits and certified cheques and bankdrafts drawn or made against a deposit account areeligible for deposit insurance protection.

11. What types of deposits are NOT insured?Deposits not payable in Malaysia, foreign currencydeposits, money market deposits, negotiable instrumentsof deposits (NIDs), other bearer deposits andrepurchase agreements are not insured.

12. Are Islamic and conventional depositsinsured separately?Yes. Islamic and conventional deposits are eligible fora separate coverage limit of RM60,000 each.

For more information about PIDM:

• Contact Customer Service Call Centre at toll free 1-800-88-1266 from 8.30am to 5.30pm Monday to Friday

• Visit PIDM’s website at: www.pidm.gov.my

• E-mail to: [email protected]

• Write to:Communications and Public Affairs DivisionPerbadanan Insurans Deposit MalaysiaLevel 22, Dataran Kewangan Darul TakafulNo. 4, Jalan Sultan Sulaiman50000 Kuala Lumpur

Tel : 03-2260 7436Fax: 03-2260 7431/7432

CONTACT DETAILS


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