Malaysian Financial SystemTABLE OF CONTENT CONTENT 1.0 INTRODUCTION 2.0 BACKGROUND 3.0 OBJETIVES 4.0 FUNCTIONS OF THE FINANCIAL SYSTEM 5.0 STRUCTURE OF MALAYSIAN FINANCIAL SYSTEM 5.1 Financial Institutions 5.2 Financial Market 6.0 CONCLUSION 7.0 BIBLIOGRAPHY PAGE 2 3 4 5 8 9 12 14 15 Monetary Economics (ECO 553) 1 It also comprises the set of institutions. Financial system channels household savings to the corporate sector and allocate investment funds among firms. investment bankers. financial system is “a well-organized structure that is monitored closely by a supervisory authority to ensure rules and regulations are adhered to by the financial market participants in the financial system”.0 INTRODUCTION According to Ibrahim Abdul Rahman.Malaysian Financial System 1. financial system is divided into two categories. Other than that. and loan institutions. derivatives market. and offshore market. financial system includes commercial banks. the stock and bond markets. life insurance companies. an optimal financial system relies on both financial markets and financial intermediaries. Different countries have different financial systems. and many other institutions and markets in the private sector. financial market comprise four major market which are money and foreign exchange market. Financial institutions comprise of banking system and non-bank financial intermediaries. markets and relationships that is involved in borrowing and lending funds and that affects the volume and cost of credit. which are financial institutions and financial market. Monetary Economics (ECO 553) 2 . savings. capital market. They allow smoothing transactions of consumption by household and expenditures by firms and also enable households and firms to share risks. Besides. Furthermore. In Malaysia. This has attracts not only Muslim customers but also non-Muslim customers. Many new banking products and services have been introduced. Malaysian financial system has gone through evolutionary cycle since then until now.0 BACKGROUND The financial system in Malaysia was first started in year 1859 when the first commercial bank in Malaysia. Malaysian financial system has emerged as one of the renowned financial markets in the region as well as in the world. a branch of a British exchange bank which is The Chartered Mercantile Bank of India. London and China was established in Penang. Ringgit Malaysia. This is to maintain a good and stable financial system.Malaysian Financial System 2. They introduced our currency. Today. Bank Negara Malaysia was established as the central bank of Malaysia. Bank Negara Malaysia also ensures that all the members in the financial system follow all the rules and regulations stated. Monetary Economics (ECO 553) 3 . Our banking sectors are also expanding especially Islamic banking sectors. Monetary Economics (ECO 553) 4 . 2) To explain why is it important to individuals and to Malaysian economy as a whole.Malaysian Financial System 3. 3) To identify what are the important components in the financial systems.0 OBJECTIVES The objectives of studying the functions of financial system and the structure of financial system in Malaysia are as follows: 1) To learn how financial systems what is financial systems and how does it works in the economy. Malaysian Financial System 4. a household buys a corporate bond from a corporation. a household puts money/funds into a savings account of a commercial bank. For example. It facilitates the channelization of the savings of individuals for example. Indirect transfer is where the transfer of funds from the savers/lenders to the borrowers is done through a financial intermediary (indirectly). the function of the financial system is to transfer loanable funds from lenders or the surplus units to borrowers or the deficit units. For example. Figure below illustrates the flow of transfer of funds of both modes: Monetary Economics (ECO 553) 5 . Financial system brings together individuals and institutions providing supply of funds with the demanding funds. The household is lending directly to the corporation. There are direct transfer and indirect transfer. to various borrowers which are companies where they use the funds to increase the production of goods and services which will then improves the growth of the economy. Then. the bank may lend the funds to borrowers. Direct transfer is where the savers/lenders transfer the funds to the borrowers directly.0 FUNCTIONS OF THE FINANCIAL SYSTEM Basically. The figure below further illustrates the above function of financial system: Loanable funds (credit) Loanable funds (credit) Ultimate lenders of funds (surplus units) Financial intermediaries & other financial institutions Ultimate borrowers of funds (deficit units) THE FINANCIAL SYSTEM There are two modes of transferring funds between savers/lenders and borrowers. We can see here that the funds are not directly transferred from the savers and the borrowers but through an intermediary which is the commercial bank. We can say that the financial system controls the flow of funds. and other transaction media. 2) PAYMENTS The financial system provides a mechanism for making payments for everyone. the productivity of a country’s resources increases and also increases the standard of living for the citizens. We can also make payment whenever and wherever we want with the help of checks.Malaysian Financial System DIRECT FINANCE LENDERS/SAVERS Household Firms Government Non-residents Funds FINANCIAL MARKET Money Market Capital Market BORROWERS /SPENDERS Funds Firms Government Household Non-residents Funds Funds FINANCIAL INTERMEDIARIES Credit Institutions Other monetary financial institutions Other INDIRECT FINANCE Funds 1) CREDIT The financial system supplies credit for people to support their purchases of goods and services or to finance capital investment. to buy their dream cars or houses in credit (personal loans) and pay the loan back in instalment. This allows individuals who have insufficient funds to buy cars or houses for example. Monetary Economics (ECO 553) 6 . Same goes to corporations which are in needs of funds to finance their projects. While with investment. credit card and debit card. checking accounts. Without the financial system today. We can make payments in the form of currency/fiat money. Money serves as a medium of exchange in purchasing goods and services. Savers lend their savings/surplus funds to borrowers and in return they will gain return in from of interest. 3) MONEY CREATION The financial system makes it possible for money creation. We are moving away from payments made in paper toward a system where funds are moved via computer hook up. Individuals and corporations save money today so that they can consume more goods and services in future. dividends. This is through the credit facilities and the mechanism for making payments. The financial system usually offers high interest rates to encourage savers to save more money and consume less when the demands from borrowers (deficit units) are high. Monetary Economics (ECO 553) 7 . 4) SAVINGS The financial system provides a place for savings. capital gains. and so forth.Malaysian Financial System one still has to take cash wherever he or she goes which would have been impossible. It eliminates the inconvenience of barter system. Banking Institutions • Commercial Banks •Investment Banks •Islamic Banks 3. Others • Unit Trusts • Pilgrims Fund Board • Housing Credit Institutions • Cagamas Berhad • Credit Guarantee Corporation • Leasing Companies • Factoring Companies MONEY & FOREIGN EXCHANGE MARKET 1. Money market 2.Malaysian Financial System 5. KLIBOR Futures OFFSHORE MARKET Labuan International Offshore FInancial Center (IOFC) Monetary Economics (ECO 553) 8 . The diagram below further illustrates the structure of Malaysian Financial system. Financial System Financial Institutions Financial Market BANKING SYSTEM 1. Insurance Companies 3. KLSE CI Futures 3. Foreign exchange market CAPITAL MARKET 1. Development Finance Institutions 4.Bank Negara Malaysia 2. Savings Institutions • National Savings Bank • Co-operative Societies 5. Bond market -public debt securitites -private debt securitites DERIVATIVE S MARKET 1.0 STRUCTURE OF MALAYSIAN FINANCIAL SYSTEM Malaysian financial system can be divided into two. There are financial institutions and financial market. Provident and Pension Funds 2. Others •Discount Houses •Representati ve Offices of Foreign Banks NON-BANK FINANCIAL INERMEDIARIES 1. Commodity futures 2. Equity market 2. It can be divided into 2 major categories which is banking system and non-bank financial intermediaries. provision of finance and such other business. and non-banking institutions. 1) BANK NEGARA MALAYSIA (BNM) Bank Negara Malaysia is established on 26 January 1959. commercial bank is an institution that does the business banking which is the business of receiving deposits. According to Banking and Financial Institutions Act 1989 (BAFIA).1. The objectives and functions of the central bank are as follows: 2) To issue currency and to keep reserves safeguarding the value of that currency To act as a banker and financial adviser to the government To promote monetary stability and a sound financial structure To influence the credit situation to the advantage of the country BANKING INSTITUTIONS Malaysian banking institutions consist of commercial banks. and investment banks. Financial institution also provides loans to customer and purchase investment services. Commercial banks offer many products to customers such as savings account. Monetary Economics (ECO 553) 9 . BNM is the central bank for Malaysia. It is regulated by Central Bank Ordinance (CBO) 1958. banking institutions. They also act as intermediaries from the surplus unit to deficit unit. Islamic banks.1 BANKING SYSTEM Malaysian banking system consists of Bank Negara Malaysia. paying or collecting cheques. loans activities. 5. current account. bond and loans instead of real assets such as building.Malaysian Financial System 5.1 FINANCIAL INSTITUTIONS Financial institution is a business firm where their assets are stock. a) COMMERCIAL BANKS Commercial banks are the largest and most important group of financial institutions in Malaysia. raw material and equipment. insurance companies. They also involve in venture capital financing. They offer Islamic banking products and services which can be used by not only Muslim but also the non-Muslim c) INVESTMENT BANKS Investment banks provide services such as providing advisory services and management services to corporations. Malaysian Non-bank Financial intermediaries are mainly comprise of Provident and pension funds. 5. development finance institutions. Each worker in Malaysia is compulsory to have this account. In 1989. and portfolio management. There are 2 accounts.Malaysian Financial System b) ISLAMIC BANKS Islamic banks conduct banking business which similar to other commercial banks but they follow the principal of Shariah. Monetary Economics (ECO 553) 10 . Discount houses specialize in short-term money market operation and mobilize deposits from financial institutions and corporations. Each account can be withdrawn in line with their purpose. underwriting services. 3) OTHERS DISCOUNT HOUSES Discount houses in Malaysia began it operation in 1963. medical. and savings institutions.1.2 NON-BANK FINANCIAL INTERMEDIARIES Basically. Some of the activities that they do are loan syndication. or disability benefits. Discount houses are only group that allowed money at call. death. discount houses came under BAFIA. 1) PROVIDENT AND PENSION FUNDS Provident and pension funds are groups of financial schemes designed to provide members and their dependents with a measure of social security in the form of retirement. Discount houses were appointed to be sole principle dealer for TB. Some of main development finance institutions in Malaysia are: Bank Pertanian Malaysia Bank Industri & Teknologi Malaysia Bank Pembangunan & Infrastruktur Malaysia Berhad 4) SAVING INSTITUTIONS Main purpose of saving institutions in Malaysia is to promote and mobilise saving to the middle and lower income group and especially people in rural area. pilgrims fund board.Malaysian Financial System 2) INSURANCE COMPANIES There is 4 types of insurance in Malaysia which is life. These institutions are specialized in middle and long term financing. Insurance also provide saving to the holder in terms of saving for child education or contingency fund. They will invest the funds that they receive from the surplus units to generate profit. It consists of unit trust. Cagamas Berhad. Monetary Economics (ECO 553) 11 . credit guarantee corporation. 3) DEVELOPMENT FINANCE INSTITUTIONS Development finance institutions are established by government to promote investment in manufacturing and agriculture sector. Saving institution consists of national saving bank which is Bank Simpanan Nasional and cooperative societies. 5) OTHER NON-BANK FINANCIAL INTERMEDIARIES It acts as intermediaries which connect people who have surplus (lenders) and people who deficit (borrowers). leasing companies. factoring companies and venture capital companies. All types of insurance have the same purpose which is to protect the holder of the insurance from many aspect which their cover to. housing credit institutions. professional and export credit re-insurance. general. non-bank institutions such as Pension funds and Unit trust.Malaysian Financial System 5. Foreign Exchange market is a necessary market for corporations to complete their international transactions. and money brokers.2 FINANCIAL MARKET The Financial System in Malaysia is divided into two portions which is financial institutions and financial market. non-bank financial institutions. 1) MONEY AND FOREIGN EXCHANGE MARKET Money market is a market that provides a short-term utilization of funds among market participants which is Central bank. 2) CAPITAL MARKET The capital market which comprised of the equity and the bond market focus more on long-term investment or instruments. Basically. corporations. The bond market on the other hand. it is also known as financial instruments trading market for surplus and the deficit units in the financial system. Capital Markets. and Offshore Market. Equity market provides the facility of rising of funds to corporations by issuing stocks and shares and also the trading of shares in the secondary markets. is another alternative place where private and public sector can raise funds by issuing private and government debt securities. The financial market is below divided into four markets which depend on their own functions and objectives. banking institutions. corporations. The participants of foreign exchange market include of commercial banks. All corporations that doing import and export business is need to purchase the required currencies for them to effect payment or to convert the currencies received from the other country to a local currency. Central bank. and money broker. Monetary Economics (ECO 553) 12 . Derivatives Markets. It is a place where lenders and borrowers of funds meets and perform their transactions to fulfil their short-term fund desires. There are Money and Foreign Exchange Markets. Derivatives are financial instruments used to manage one’s exposure in today’s volatile market. It is a market whereby offshore companies offered a financial products and services that meet the needs of financial market participants in a low tax system. exchange rates. Offshore market in Malaysia is located in Labuan with the establishment of Labuan Offshore Financial Services Authority (LOFSA) in 1996. Monetary Economics (ECO 553) 13 . 4) OFFSHORE MARKET The offshore market is a market where assets are moved actively by market participants who are in surplus and deficit units in an offshore financial centre having specific and unique features. indices and share prices. such as commodity prices.Malaysian Financial System 3) DERIVATIVES MARKET The derivatives market provides a possibility where domestic and international market participants can manage their risk exposures in an efficient and cost effective method. A derivative product’s value depends upon and is derived from an underlying instrument. interest rates. A financial system also can affect the financial development with a strong regulation of international capital movements. Recent years have seen that financial system that has outgrown in size.0 CONCLUSION As a conclusion.Malaysian Financial System 6. Monetary Economics (ECO 553) 14 . financial system plays a very important role in the economy. 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