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The Malaysian Financial System

J essica Chew
Assistant Governor
Bank Negara Malaysia
21 April 2011
Financial Sector Talent Enrichment Programme
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Lets discuss the role of
the financial system
bank negara malaysia
YOU
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Landscape of the Malaysian financial system
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commercial
banks
Islamic banks investment banks
(re)insurance
companies
(re)takaful
operators
development
finance
institutions
money market foreign exchange market
asset/ fund
management
companies
stock
broking
companies
unit trust
companies
venture
capital/ private
equity
equity market
debt securities
market
offshore
banking
offshore
insurance
offshore fund
management
companies
other offshore
financial
institutions
international
Islamic banks
international
takaful
operators
derivatives
market
payment system
operators
payment system issuers
clearing systems for
securities / funds / cheques / derivatives
BANK NEGARA MALAYSI A SECURI TI ES COMMI SSI ON
LABUAN
FSA
non-bank
financial
inter-
mediaries
provident &
pension funds
Cagamas cooperatives
Credit
Guarantee
Corporation
money lenders
housing credit
institutions
financial
planners
dealers/ brokers
money brokers
insurance
brokers/
adjustors
financial
advisors
factoring &
leasing
companies
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
sector
corporate
sector
financial
sector
macroeconomy
financial & property markets
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 market
functioning, with adverse implications for the broader economy
Widespread unemployment
Social repercussions
Weakened local and foreign investor
confidence in financial sector
Consequences of financial instability
Asian financial crisis Malaysias 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)
8
0
200
400
600
800
1000
1200
1400
1600
US savings &
loan crisis (1986-
95)
J apan banking
crisis (1990-99)
Asia financial
crisis (1998-99)
US subprime
crisis (2007-
present)
0
5
10
15
20
25
30
35
40
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
the total cost of the Asian Financial Crisis
amounted to USD400 billion!!!
How long would it take to count to 400 billion?
If you count one number a second without stopping
until you reach a billion, that task would take you 31
years, 259 days, 1 hours, 46 minutes, and 40
seconds.
Multiply that by 400.
What can USD400 billion buy?
20 million
iPhones
11.4 billion
bananas
1.3 billion
movie tickets
250,000
Chanel bags
Review of Banking Licence Fees 9
Cost of the global financial crisis.?
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 and
deregulation
Financial crisis
Confidence crisis
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 mobilisingsavings, diversifying risks and allocating resources)
and be avoided
Rapid credit
expansion
Liberalisation of
financial system
Financial stability
Protection of
consumers
Preserve market
confidence
Effective
regulation/
supervision & crisis
management
Principal objects
Promote monetary stability and financial stability conducive to
the 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 financial 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 in
terms of maintaining confidence in the financial
system
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Financial stability encompasses both efficiency and
resilience of the financial system

financial system
smoothly absorbs
financial and real
economic shocks
financial resources are
allocated smoothly and
efficiently
financial risks are
assessed, managed and
priced reasonably
financial
stability
Source: Schinasi (2006)
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Changing landscape brings new challenges
Structural
transformations
Globalisation
Financial conglomeration
Larger and more complex financial institutions
New business models
Breakdown of geographical barriers
Increased cross-border flows & linkages
More contestable
markets
Advances in
financial
engineering
Dismantling of traditional boundaries between
intermediaries
Emergence of structured products
Increasing importance of pooled funds (pensions, life
insurance, mutual funds, investment trusts) as
channel of savings
Securitisation
Credit derivatives
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A comprehensive framework is essential to support financial
stability
comprehensive
surveillance
framework
robust
financial
infrastructure
efficient
safety nets
sound
supervisory
framework
effective
regulatory
framework
Market transparency
Strong corporate governance
Sound risk management
Effective legal framework
And prudential standards
Responsibility to consumers
Financial sector development complements the regulation and
supervision of financial institutions
Development of
financial markets
Consumer protection
arrangements
Human capital
development
Institutional and
capacity building
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Promoting balanced & equitable through financial
inclusion
ensure all economic sectors, regions and the population at large
have access to a broad range of financial products and services
political
stability
nation
building
growth with
balanced
distribution
social
harmony
peoples
confidence
financial
inclusion
access to financing
access to financial services
access to financial information access to financial assistance
The five pillars in building an inclusive financial sector in Malaysia
Conducive environment for greater financial inclusion
1 2 3
4
5
Create a
diverse range
of financial
service
providers that
thrives and
competes
Enhance
distribution
channels to
ensure
widespread
access to
financial
services
Improve
financial
literacy,
advisory,
awareness
and
consumer
education
Ensure a
minimum level
of banking
products and
services are
provided at
reasonable
costs
Strengthen
the
supporting
financial
infrastructure
and enabling
environment
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Comprehensive blueprints to develop and strengthen the financial
system
financial sector masterplan capital markets masterplan
PHASE I PHASE II PHASE III
build capacity & capability
enhance infrastructure
level playing field
intensify competition
assimilate into
global arena
introduce new foreign
competition
2001 2010
11.7% 9.7%
greater financial sector contribution to GDP
stronger financial institutions arising from capacity building measures
domestic financial institutions with presence abroad
Malaysia I nternational I slamic Financial Centre
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The Malaysian financial sector moving forward
greater role as an enabler, catalyst and driver of growth
Reinforce Malaysias 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 DRI VER
Accelerate growth of
supporting and ancillary
services sectors
Generate higher
contribution to gross
domestic product
PROMOTE SOCI O-ECONOMI C DEVELOPMENT OF MALAYSI A
PRESERVE FI NANCI AL SOUNDNESS & STABI LI TY
Realignment of regulatory and supervisory functions to further
enhance 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 SECTOR
SUPERVISION
SECTOR
ISLAMIC
BANKING &
TAKAFUL
BEFORE
REALIGNMENT
DFE
Financial
Surveillance
Prudential
Financial
Policy
Consumer
and Market
Conduct
Islamic
Banking and
Takaful
Development
Development Financial
Enterprises
Financial
Conglomerates
Supervision
Banking
Supervision
Insurance and
Takaful
Supervision
Supervisory
Practices unit
Payment
Systems
Policy
PAYMENT
SYSTEMS
Payment System Policy
Complementary external framework further reinforces
sound financial sector
Malaysia Deposit
Insurance
Corporation
Malaysian Accounting
Standards Board
Industry associations
Professional bodies
Administers statutory deposit insurance system
Differential premium contributions to deposit
insurance fund based on risk profile of individual
institutions
Responsible for financial reporting standards
Promotes convergence with international reporting
standards
Establishes industry rules on market practices and
conduct of market intermediaries
Accounting, actuarial, legal and financial analysts
Establishes codes of conduct and good practice
Provides guidance to members in specific areas
relating to professions discharge of roles &
responsibilities
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Your role in the Malaysian financial system
consumer
employee
MALAYSI AN ECONOMY
financial system
bank negara
malaysia
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 Development
Corporation
http://www.smidec.gov.my/
Bursa Malaysia
http://www.bursamalaysia.com/
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THANK YOU
Questions?
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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 banks
but based on Shariah principles
Islamic banking services available via:
Domestic-owned Islamic banks
Conventional commercial banks which offer Islamic banking services
through 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
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Investment bank framework
Entities Formula for IBs formation Minimum Capital
Requirement
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 I nstitutions Act 1989)
Capital market services license (under Capital Market Services Act
2007)
J ointly 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 and
finance, arranging for issue and listing of shares, and investment portfolio
management
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
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Comparing CBs and IBs
Commercial Banks Investment Banks
Regulatory body BNM BNM +SC
Min capital funds
RM2 b (banking group)
RM300m for stand alone
Islamic banks & foreign
banks
RM2 b (banking group)
RM500m for stand alone
banks
Products and services
i) Loans
i) Deposits
ii) 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
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Owned or largely
funded by the
Government
Functions
To develop and promote certain
strategic sectors of the economy
(specialised institutions)
To achieve socio-economic goals
To complement the role of the
banking 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
I nsurance & Takaful I ndustry
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
insurers business. Takaful business for the benefit of individual & family
General 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
Arrange deals between interbank institutions in fixed income, money
market instruments, forex, cash & unlisted derivatives products in the
wholesale markets
Money brokers may also arrange deals between banking institutions and
foreign 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 Bhd
4) Forex Enterprise Sdn Bhd
5) Harlow's & MGI Sdn Bhd
6) KAF-Astley & Pearce Sdn Bhd
As financial intermediaries, money brokers
play important role in facilitating interbank
trades, but pose minimal impact on financial
system stability
Money brokers do not pose
systemic risk:
Only provide service and
act as middle person for
market participants - do
not take position
Not custodian of public
funds
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Financial Markets
Money Market Market for ST funds (maturities <12 mths)
Interbank borrowing & placement, repo and SBL transactions
Purchase & sale of ST papers
Forex Market Market for buying and selling of one currency against RMor against other foreign currencies
Dealings in forex market throughspot, forwardor swap market
Under the Exchange Control Act 1953, FX transactions have to be undertaken through authorised
dealers (CBs & designated IBs)
Capital Market Market for LT funds for conventional & Islamic financial assets
Equity Market Avenue for corporations to raise funds by issuing stocks & shares
Secondary market trading in stocks and shares is conducted through stockbrokers on Bursa Malaysia,
inclusive of ACE Market
Bond Market Avenue for issuers to raise funds via debentures
Comprises public and private debt securities and sukuk market
OTC secondary market
Derivatives
Market
Markets for trading instruments that provide contingent claims on underlying assets
Main use - to hedge against volatility in the price of the underlying assets
Examples - forwards, futures, options, swaps, and credit derivatives
Instruments traded - stock index, interest rate & commodity futures