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The Malaysian Financial System
Jessica Chew Assistant Governor
Bank Negara Malaysia
21 April 2011
Financial Sector Talent Enrichment Programme
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Let’s discuss the role of…
the financial system
bank negara malaysia
YOU
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Landscape of the Malaysian financial system
i n s t i t u t i o n s
m a r k e t s
p a y m e n t &
s e t t l e m e n t
s y s t e m s
commercialbanks Islamic banks investment banks
(re)insurancecompanies
(re)takafuloperators
developmentfinance
institutions
money market foreign exchange market
asset/fundmanagement
companies
stock
brokingcompanies
unit trustcompanies
venturecapital/private
equity
equity market
debt securitiesmarket
offshorebanking
offshoreinsurance
offshore fundmanagement
companies
other offshorefinancial
institutions
internationalIslamic banks
internationaltakaful
operators
derivativesmarket
payment systemoperators
payment system issuers
clearing systems forsecurities / funds / cheques / derivatives
BANK NEGARA MALAYSIA SECURITIES COMMISSIONLABUAN
FSA
non-bankfinancial
inter-mediaries
prov iden t
pens ion funds
Cagam as coopera t ives
Cred i t
Guaran tee
Corpora t ion
money l ende rs
hous ing c red i t
in s t i tu t ions
financialplanners
dealers/ brokers
money brokers
insurancebrokers/adjustors
financialadvisors
factoring &leasing
companies
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Diversified financial system
Strong financials
Contributes almost 12% of GDP
Workforce of 150,000
Regional presence
Global leader and centre for Islamic finance
Largest bond market in South East Asia
A snapshot of the financial sector…
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The financial sector and the economy
household
sectorcorporate
sectorfinancial
sector
macroeconomy
financial & property markets
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Disruption in financial intermediation Credit crunch or lack of financing for new
investments and consumption activities Settlement risk in payment systems Financial market dislocations
Financial instability can cause serious breakdown in marketfunctioning, with adverse implications for the broader economy…
Widespread unemployment Social repercussions
Weakened local and foreign investorconfidence in financial sector
Consequences of financial instability
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Asian financial crisis – Malaysia’s experience
Corporate sector health
Household wealth
Investment & consumption
Pressure on
Banking system
NPLs (2.2% 7.7%)
Capital erosion
Over-concentration of
risk
Declined economic
activities
GDP contracted 7.5%
Weak regional export
demand
Inefficiency in
intermediation process
Tight liquidity
Sharp loan growth moderation
VICIOUS CRISIS
CYCLE
Extreme volatility in financial
markets
Downgrading of sovereign rating
from A+ to BBB- (S&P)
Fall in currency value
Ringgit depreciated by 40% against USD
Fall in stock market value
Declined by over 70% (Aug ’98)
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0200400600800
10001200
14001600
US savings &
loan crisis (1986-
95)
Japan banking
crisis (1990-99)
Asia financial
crisis (1998-99)
US subprime
crisis (2007-
present)
051015202530
3540
Bank losses Other financials % of GDP (RHS)
Putting the cost of a financial crisis into perspective
51
25
13
5
0
10
20
30
40
50
60
Indonesia Thailand S. Korea MALAYSIA
Recapitalization Purchase of NPLs Interest Costs Liquidity Support
Public costs of financial restructuring (% of GDP) Losses in USD billions
Asian Financial Crisis 1997 Comparison of Financial Crises
t h e t o t a l c o s t o f t h e A s ia n Fi n a n c ia l Cr i s i s
a m o u n t e d t o USD 4 0 0 b i l l i o n ! ! !
How long would it take to count to 400 billion?If you count one number a second without stoppinguntil you reach a billion, that task would take you 31
years, 259 days, 1 hours, 46 minutes, and 40seconds.Multiply that by 400.
What can USD400 billion buy?
20 millioniPhones
11.4 billionbananas
1.3 billionmovie tickets
250,000Chanel bags
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Review of Banking Licence Fees 9
Cost of the global financial crisis….?
http://www.cagle.com/caglecards/main.asp?image=http://cagle.com/working/080917/beattie.jpghttp://www.cagle.com/caglecards/main.asp?image=http://cagle.com/working/080917/beattie.jpghttp://www.cagle.com/caglecards/main.asp?image=http://cagle.com/working/080917/beattie.jpg
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• Weak credit assessments
• Speculative activities
• High leverage
Economic shocks
from greater market
volatility
• interest/exchange
rates
• asset prices
• liquidity
• Weakened banking system
• Reduced credit availability
• Economic slow down
How a financial crisis can occur…
Rapid credit
expansion
Liberalisation andderegulation
Financial crisis
• Confidence crisis
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• Sound risk management
• Strong financial condition
Economic shocks
from greater market
volatility
• interest rates• asset prices
• Able to absorb shocks
• Continued performance of efficient intermediation function
(of mobilising savings, diversifying risks and allocating resources)
…and be avoided
Rapid creditexpansion
Liberalisation offinancial system
Financial stability
• Protection of
consumers
• Preserve market
confidence
Effectiveregulation/
supervision & crisis
management
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Principal objects
Promote monetary stability and financial stability conducive tothe sustainable growth of the Malaysian economy
Role of Bank Negara Malaysia within the financial system
Primary functions
• Regulate and supervise financial
institutions
• Promote sound, progressive and
inclusive f inancial system
• Provide oversight over the money
and foreign exchange market
• Exercise oversight over payment
system
What is financial stability?
• “...a condition in which the financial system –
comprising financial intermediaries, markets &
market infrastructures – is capable of
withstanding shocks...”
• “In a broad sense… think of financial stability interms of maintaining confidence in the financial
system”
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Financial stability encompasses both efficiency andresilience of the financial system
……
…financial systemsmoothly absorbsfinancial and realeconomic shocks
financial resources areallocated smoothly and
efficiently
financial risks areassessed, managed and
priced reasonably
financialstability
Source: Schinasi (2006)
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Changing landscape brings new challenges
Structuraltransformations
Globalisation
• Financial conglomeration
• Larger and more complex financial institutions
• New business models
• Breakdown of geographical barriers
• Increased cross-border flows & linkages
More contestablemarkets
Advances infinancial
engineering
• Dismantling of traditional boundaries betweenintermediaries
• Emergence of structured products
• Increasing importance of pooled funds (pensions, lifeinsurance, mutual funds, investment trusts) aschannel of savings
• Securitisation
• Credit derivatives
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A comprehensive framework is essential to support financialstability
comprehensive
surveillanceframework
robustfinancial
infrastructure
efficientsafety nets
soundsupervisoryframework
effectiveregulatoryframework
Market transparency
Strong corporate governance
Sound risk management
Effective legal framework And prudential standards
Responsibility to consumers
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Financial sector development complements the regulation andsupervision of financial institutions
Development offinancial markets
Consumer protectionarrangements
Human capitaldevelopment
Institutional andcapacity building
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Promoting balanced & equitable through financialinclusion
ensure a l l e conom ic secto r s , r eg ions and th e popu la t ion a t l a rge
hav e access to a b road range o f f inan c i a l p roduc t s an d se rv i ce s
politicalstability
nationbuilding growth with
balanceddistribution
socialharmony
people’sconfidence
financial
inclusion
access to financingaccess to financial services
access to financial information access to financial assistance
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The five pillars in building an inclusive financial sector in Malaysia
Co n d u c i v e e n v i r o n m e n t f o r g r e a t e r f i n a n c i a l i n c lu s i o n
1 2 3 4 5
Create a
diverse range
of financial
service
providers that
thrives andcompetes
Enhance
distribution
channels toensure
widespread
access to
financial
services
Improve
financial
literacy,advisory,
awareness
andconsumer
education
Ensure a
minimum level
of banking
products and
services are
provided atreasonable
costs
Strengthen
the
supporting
financial
infrastructure
and enablingenvironment
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Comprehensive blueprints to develop and strengthen the financialsystem
financial sector masterplan capital markets masterplan
PHASE I PHASE II PHASE III
build capacity & capability
enhance infrastructure
level playing field
intensify competition
assimilate intoglobal arena
introduce new foreigncompetition
2001 2010
11.7%9.7%grea te r f inanc i a l sec to r cont r i bu t i on to GD P
s t ronge r f i nanc ia l i ns t i tu t ions a r i s ing f r om capac i t y bu i ld i ng m easures
dom est i c f inanc i a l i ns t itu t i ons w i th p resence ab road
M a lays i a In te rna t iona l I s l am i c F inanc i a l Cent re
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The Malaysian financial sector moving forward
greater role as an enabler, catalyst and driver of growth
Reinforce Malaysia’s position as an international hub for Islamic services
through accelerated development and promotion of Islamic finance
Foster increased international linkages and regional integration
through enhanced presence of Malaysian financial institutions & development of
the domestic and regional financial markets
ENABLER
Facilitate transformation
into a high income, high
value-added economy
CATALYST DRIVER
Accelerate growth of
supporting and ancillary
services sectors
Generate higher
contribution to gross
domestic product
PROMOTE SOCIO-ECONOMIC DEVELOPMENT OF MALAYSIA
PRESERVE FINANCIAL SOUNDNESS & STABILITY
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Realignment of regulatory and supervisory functions to furtherenhance effectiveness
• From sectoral to
functional organisation
• Provide more
comprehensive view and
cohesive approach to
development of financial
system
• Ensure clear distinction
between prudential
regulation &
developmental
objectives
• Sharpen focus on risk
management with
greater consistency in
management of similar
risks
Financial
Sector
Development
BANKING
INSURANCE
REGULATION SECTORSUPERVISION
SECTOR
ISLAMIC
BANKING &
TAKAFUL
BEFORE
REALIGNMENT
DFE
FinancialSurveillance
Prudential
Financial
Policy
Consumerand Market
Conduct
Islamic
Banking and
Takaful
Development
Development Financial
Enterprises
FinancialConglomerates
Supervision
Banking
Supervision
Insurance and
Takaful
Supervision
Supervisory
Practices unit
Payment
Systems
Policy
PAYMENT
SYSTEMS
Payment System Poli cy
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Complementary external framework further reinforcessound financial sector
Malaysia Deposit
InsuranceCorporation
Malaysian Accounting
Standards Board
Industry associations
Professional bodies
• Administers statutory deposit insurance system
• Differential premium contributions to depositinsurance fund based on risk profile of individualinstitutions
• Responsible for financial reporting standards
• Promotes convergence with international reporting
standards
• Establishes industry rules on market practices andconduct of market intermediaries
• Accounting, actuarial, legal and financial analysts
• Establishes codes of conduct and good practice
• Provides guidance to members in specific areasrelating to profession’s discharge of roles &responsibilities
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Your role in the Malaysian financial system
consumer
employee
MALAYSIAN ECONOMY
financial system
bank negaramalaysia
financial institutions
YOU
leader
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Useful links Bank Negara Malaysia
– http://www.bnm.gov.my
Malaysian Deposit Insurance Corporation – http://www.pidm.gov.my
Information portals
– http://www.bankinginfo.com.my
– http://www.insuranceinfo.com.my
– http://www.smeinfo.com.my
Centres for education and development – http://www.iclif.org
– http://www.inceif.org
– http://www.seacen.org/
– http://www.ifsb.org/
– http://www.insurance.com.my/
Other regulators
– http://www.sc.com.my
– http://www.lofsa.gov.my
Institutes / Associations of Industries
– http://www.ibbm.org.my
– http://www.aibim.com/
– http://www.liam.org.my/
– http://www.piam.org.my/
Financial Mediation Bureau
– http://www.fmb.org.my/
Credit Counselling and Debt Management Agency
– http://www.akpk.org.my
Credit Guarantee Corporation Malaysia Berhad
– http://www.cgc.gov.my/
Malaysia International Islamic Financial Centre
– http://www.mifc.com/
Cagamas Berhad
– http://www.cagamas.com.my/
Small and Medium Industries DevelopmentCorporation
– http://www.smidec.gov.my/
Bursa Malaysia
– http://www.bursamalaysia.com/
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THANK YOU
Questions?
B i fC i l b k
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Wide range of corporate and retail services
– Acceptance of deposits : savings, time and demand
– Extension of loans : term, revolving, trade finance, credit cards, overdrafts
– Treasury services : foreign currency dealings, derivative instruments
– Payments services : cheque clearing, remittances
– Custodial services
– Wealth management services
Largest mobiliser and provider of funds
Specialise in retail & consumer banking
– Acceptance of deposits : savings, time
– Loans : Hire purchase for cars, leasing, housing loan, secured personal
loans and secured guarantees
Business of Commercial banks
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Islamic banking activities
Islamic banks carry out almost similar activities in nature as commercial banksbut based on Shariah principles
Islamic banking services available via:
– Domestic-owned Islamic banks
– Conventional commercial banks which offer Islamic banking servicesthrough Islamic windows or full fledged Islamic subsidiaries
– Foreign Islamic banks
Islamic Interbank Money Market established since 1994 – Facilitates interbank acceptance and investment
– Trading of Islamic instruments
– Facilitates better asset liability management
I t tb k f k
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Investment bank framework
Entities Formula for IBs formation Minimum CapitalRequirement
Within banking
groups
Merchant bank + Stockbroking company RM2 billion
(on Group basis)
Universal brokers Universal Brokers + Discount House
RM500 million
Discount houses 2 Discount Houses + Stockbroking company
Holds 2 licenses
– Merchant bank (under Banking & Financial Institutions Act 1989)
– Capital market services license (under Capital Market Services Act2007)
Jointly regulated by BNM and SC
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Business of investment banks
Wholesale banking business
– Focus on serving the corporate sector, specialising in corporate advisory andfinance, arranging for issue and listing of shares, and investment portfoliomanagement
Activities undertaken
– Underwriter or agent for corporations issuing securities
– Offer advisory services to investors› Facilitate mergers and acquisitions, securities offerings and corporate restructuring
– Act as a broker for institutional clients
– Permitted to accept deposit from any persons› Deposit must with a minimum amount of RM500,000
C i CB d IB
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Comparing CBs and IBsCommercial Banks Investment Banks
Regulatory body BNM BNM + SC
Min capital funds RM2 b (banking group)
RM300m for stand aloneIslamic banks & foreignbanks
RM2 b (banking group)
RM500m for stand alonebanks
Products and services
i) Loans
i) Deposits
i i) Other activities
All types
All types
Not allowed to deal in
equities
Usually ancillary to fee
based activities
Corporate and interbank
(RM500k min)
Stockbroking
Advisory services
D l t Fi i l I tit ti
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Owned or largelyfunded by the
Government Functions
• To develop and promote certainstrategic sectors of the economy(specialised institutions)
• To achieve socio-economic goals
•
To complement the role of thebanking institutions
DFIs
Development Financial Institutions
Regulated by BNM:• Bank Pembangunan• SME Bank
• EXIM Bank• Bank Simpanan Nasional• Bank Kerjasama Rakyat• Agrobank
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• Life / Family takaful• General
• Composite
• Reinsurers / Retakaful
• Insurance / Takaful
brokers• Loss adjusters
• Financial advisors
Insurance & Takaful Industry
Insurers/Takaful Operators Intermediaries
• Mobilises long-term savings to
support economic growth• Risk management & financial
planning solutions for
businesses & individuals
Type of Insurance Activities
Life Insurance / Family
Takaful Operators
Insurance business concerned with life policies and those incidental to life
insurer’s business. Takaful business for the benefit of individual & familyGeneral Insurance / General
Takaful Operator
All insurance business which is not life business (eg. property and liability)
All takaful business which is not family takaful business
Composite Insurance Combination of life and general insurance by a single entity
Reinsurance Company /
Retakaful Operator
Insurance of risks assumed by the insurer under the policies it has issued.
Offers coverage for takaful companies against risks, loss or dilution of its
capital and reserves resulting from high-claim exposure.
Insurance / Takaful brokers Solicit, negotiate or procure a policy from an insurer / takaful operator
Insurance / Takaful adjusters Ascertaining cause, circumstance & quantum of loss
Financial advisors Financial planning advise relating to insurance products
Money Brokers
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Money Brokers
Arrange deals between interbank institutions in fixed income, moneymarket instruments, forex, cash & unlisted derivatives products in thewholesale markets
Money brokers may also arrange deals between banking institutions andforeign counterparties in the international money market
6 money brokers:
1) Affin Moneybrokers Sdn Bhd
2) Amanah Butler Malaysia Sdn Bhd
3) First TAZ Tradition Sdn Bhd4) Forex Enterprise Sdn Bhd
5) Harlow's & MGI Sdn Bhd
6) KAF-Astley & Pearce Sdn Bhd
As financial intermediaries, money brokersplay important role in facilitating interbanktrades, but pose minimal impact on financialsystem stability
Money brokers do not posesystemic risk:
Only provide service andact as ‘middle person’ formarket participants - donot take position
Not custodian of publicfunds
Fi i l M ket
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Financial MarketsMoney Market • Market for ST funds (maturities