the malaysian financial system

8/9/2019 The Malaysian Financial System

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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

the malaysian financial system

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