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Executive Summary F inancial
system is the backbone of any econom y of an y
country. Financial system assists in efficient allocation of money and other resources among depositors (savers) and lenders (borrowers). A sound financial system needs effective, efficient and solvent financial intermediaries. Financial intermediaries are institutions that act as mediators for those require the fund and those who want to save and invest. This report talk s about the major financial intermediaries that are operating in Germany and Malaysia. Germany has a very well developed and efficient financial system but some of the financial intermediary lik e the banking system has been suffering from lack of profitability and the ever increasing pressure on pension fund. The report tries to focus on those areas besides the effectiveness of those financial intermediaries on the overall well being of the economy. The report also discusses the major financial intermediaries that are operating in Malaysia and their effectiveness in eradicating poverty among rural and ethnic minority. In addition report attempts to discuss some the similarities and differences between the German and Malaysi an intermediaries at large. The report has discussed broadl y on the insurance system of Germany and Malaysia and in addition new concept in Malaysia, Takaful Insurance, an Islamic insurance mechanism to cater for the Muslim community. It also discussed about the thriving building society in Malaysia and Germany with the concept of Cagamas.
Purpose of the report: The purpose of the report is to explore the financial institution in general of Germany and Malaysia. The report make every effort to find sufficient information from books, journals and other reliable internet sources to find as much information regarding Financial Institutions of Germany and Malaysia. The report will attempt to relate the financial institutions role in broader economy. Hindrances: Pertaining to the fact that both the two countries official language not being English, it is often found that government websites are in Liechtenstein for Germany and Bhasha Melayu for Malaysia. Given that the problem arises from deciphering information from such equivocal sources, it might be out of scope to extract information from such sources. In addition limitation of current up to date information through the accessible sources limited the capacity of the report to put latest information of year 2010 and 2011 in every part. The scope of report: The report will primarily talk about the financial systems present in Germany and Malaysia. The report will discuss type of financial institutions, their branches, operation, regulatory body and overall scenario in general. It will not go into depth of mentioning every detail given that the word limit occurs for the report. The report will put tables, graphs, diagrams where required for clearer understanding. The report will try to find similarities and differences between the financial institutions of Germany and Malaysia. The information will be mostly secured from accessing journals, books and periodic through Tun Hussein Onn Library at Sunway University College.
Financial institutions are part of financial system. They facilitate the financial services for its clients and members. Financial intermediaries, a component of financial system, provide the service of transferring fund from surplus unit to deficit unit and thus facilitate the flow of currency throughout the economy. In addition to generate revenue financial institutions offer revenue generating service like underwriting, securities and asset or investment management of clients. The essay will discuss, compare and contrast the financial institutions of Germany and Malaysia respectively.
Some of the major Financial Institutions that are operating in Germany are as below:
Some of the major Financial Institutions that are operating in Malaysia are as below:
Germany The banking industry of Germany mainly consists of private and public credit institutions. With central bank at the top it could be categorized under five different heading as below: Deutsche Bundesbank The central bank of the Federal Republic of Germany. The primary target of Deutsche Bundesbank is to maintain stability of the general price level and financial system. It also focuses in helping prevent national and international financial crises. 1. Private Sector commercial Banks Commercial banks in Germany hold approximately 25% share in the total volume of Banking business. Private commercial banks in Germany tend to focus more on investment banking, asset management and trust business activities. These are universal banks that engage in a full range of activities, including taking deposits, granting loans and mortgages, providing life insurance, underwriting security issues, and investing directly in securities, including equities. Commercial bank can be further classified into three different types: a. The Big Banks b. Regional and other Commercial banks c. Foreign banks
2. Saving Banks
In Germany saving banks had the largest share among the four types banking industry. Initially the purpose of saving banks were not be like commercial profit making concern but instead to serve the community in rural areas who are not financially sound and to give them loan on favorable terms. Mostly the bank lent monies around where the branches were located to serve the community. Recently these banks have transformed to universal banks and have become more like commercial banks. Savings Banks is largest group in terms of total bank assets. At the end of 2010 saving bank comprised of 463 banks which accounted for 35% of total German banking assets.
Saving banks are categorized as below: 1. Local savings banks 2. State savings banks 3. Central savings bank
3. The Industrial agricultural credit cooperative Banks Cooperative initially provided credit for their member but has slowly developed to become a universal bank. Universal Bank is a term used in Germany to describe banks with the ability to engage in any type of financial activities. Cooperatives banks are usually quiet similar to saving banks in terms of function. Segments of the credit cooperative banks are as below: a. Local cooperative banks b. Regional central cooperative banks c. Federal clearing house institutions 4. Mortgage Banks Mortgage banks provide specialized range of banking service different from the universal banks. German law has limited mortgage banks from making long term mortgage loans and loans to municipalities and public authorities. Usually mortgage banks finance themselves by issuing bonds and long term deposits. Mostly the mortgage banks are subsidiary of parent commercial banks. Mortgage banks share about 12% of the total banking industry in Germany. 5. Public Banks Banks owned by the government. They are much bigger then private banks in terms of retail banking activities.
Banks in Malaysia
The banking system of Malaysia can be categorized under two fundamental institutions, monetary and the non-monetary institution. Central bank, Bank Negara Malaysia and the commercial banks fall under monetary institutions. Bank Negara Malaysia Bank Negara Malaysia is the central bank of Malaysia. It was established on 26th January in 1959. Some of the Functions of Bank Negara is listed as below: 1. To promote monetary stability in the economy 2. To provide banking and financial advice to Government of Malaysia 3. To issue currency and preserve foreign exchange reserve 4. To influence the credit situation of Malaysia
Commercial Banks in Malaysia Commercial banks are the most important part of the overall financial institution in Malaysia. For centuries commercial banks were the major deposit taker and loan provider in Malaysia. The major functions and activities of commercial banks maybe summarized as below: i) The mobilization of saving, deposits, surplus and idle funds through savings accounts, current accounts, fixed deposit accounts, negotiable instruments of deposits and through other banking, financial and investment instruments. ii) Lending money in various forms of loans, overdrafts and advances besides providing finance to private individuals and business organizations. iii) Providing banking services and facilities to encourage people and organizations to utilize the surplus fund available. iv) To provide financial assistance to Government projects and activities through subscription to Treasury Bills, Cagamas bonds, Govt Securities.
The nonmonetary institutions further fall into two groups as below: 1. Group supervised by Bank Negara Malaysia: a) Finance Companies b) Discount houses c) Foreign banks representative office d) Offshore banks 2. Group supervised by Government e) Development finance institutions f) Saving institution g) Provident and pension funds h) Insurance companies i) Other financial intermediaries
Compare and contrast of the bank in the two countries: German banks and their role in economy: German banking sector has provided vast opportunity for countries employment system. Roughly 21% of the European bankers belong to Germany in where as Germany consisted of 17% of European population. Although banks role in boosting German economy are significant and marked by amazing growth in the early 1990s due to liberalization of financial market and rapid progress in data processing and technological development. By late 1990s competition increased due to burgeoning domestic and foreign banks. German banks suffered major decline in profitability from 1998 to 2003 due to this steep competition.
In Germany banks were declared as central weakness in terms of income. The cost income ratio was about 75:100, which was considered to be very risky for the overall banking system. In order to make the banking more profitable it started to make tighten the cost pressure by initiating the following activities: 1. Cutting staff and branches 2. Cooperation with banks locally 3. Outsourcing bank jobs 4. Merging to share infrastructure 5. Tighter control over bad debt 6. Reducing equity risk
By doing the above German might be able to attain a better position although from 2005 and finally from 2007 due U.S subprime crisis and global economic slowdown German banks were affected significantly and thus the banks saw depletion in revenue. Due to progressive bailouts by the government and healthier of global economic condition German banks were able to cut the loss and improve overall performance from 2009 but so far loss hasn¶t been covered.
Malaysian banks and their role in economy: In last decade Malaysian banking business has improved significantly due to massive effort undertaken in restructuring, consolidating and rationalizing the banking sector. In addition to the introduction of Islamic banking has created an overall boom in the banking business altogether. Boom in banking sector have crated employment to over more than 80,000 Malaysian by 2007. Banking system maintained a solid financial ground with a capital ration over 13%, lo NPL ratios and continued profitability for last eleven years from 1999. Retail finance and banking service for consumer has been increased many folds. Amount loans were offered to small and medium enterprise increase from RM 71 billion in 2000 to RM 175 billion in 2009. In addition domestic banks moved out of Malaysia to tap other opportunity bearing economies.
Malaysian and German banks in comparison: Banks in Germany face relatively few regulatory restrictions than in Malaysia where the banks are strictly regulated and monitored. According to BaFin, the bank and insurance regulatory body of Germany, the Banks in Germany are passing through subprime crisis from 2007 due to global financial and economic crisis. The German Council of Economic Experts calculated a total loss of $48.00 billion for German banks between 2008 and 2009. Banks that had very good risk management were able to limit their loss. In recent time the no. of banks in Germany is declining slowly and gradually. The amount of branches and independent institutes of private commercial banks is notably lower than those of the public-sector or cooperative banks (see Table 2.1). Hence, more than 85% of the German Banks are not strictly profit-maximizing entities, but most of the cooperative banks are very small institutions
In Germany neither the savings bank nor the cooperative banks are profit oriented, a feature which was previously prevailed among the private banks, thus the in a nutshell the profitability of German banks are constricted. This can portray the negative or low profitability of overall German banking sector.
Malaysian banks are much more strictly regulated by central bank, Bank Negara. In contrast to German banks Malaysian banks saw robust profitability in last decade from 1999 after Asian financial Crisis was over. Majority banks in Malaysia are driven by household sector whereas banks in Germany are driven by large industrial investment. The banking sector is assessed to remain very stable with ample liquidity in order facilitate depositor withdrawal. In 2010 banks in Malaysia saw a growth of about 8.9% partly due to deposits made by businesses, FI¶s and individuals. The loan-to-deposit ratio was 81% while financing-to-deposit was 87%. Banks in Malaysia are required to comply with the Risk-Weighted Capital Ratio of 8% as set by Bank Negara. As of 2011 the ratio hover around 13 to 14% which is well over specified ratio. Malaysian Banks already implemented Basel 2 and is the on the way towards implementing Basel 3. Banks in Malaysia are much less exposed to complex and high risk off balance sheet then German banks and operating at capital adequacy and leverage level as specified under Basel 2. In addition to all these infrastructural change Banks in Malaysia are becoming more technology oriented and competitive and thus their primary intention which is to generate good return is thus sustained unlike the overall situation in Germany.
2. Provident or pension fund
Pension or provident funds are arrangements to provide income to people when they are retired and no longer have regular earning from any kind of employment. Pension fund forms part of the financial institutions both in Germany and Malaysia. These funds are usually very large and are invested in different schemes to generate an ongoing return on investment. Regulation of German Pension Fund: The Federal Financial Supervisory Authority (BaFin) regulates and supervises the pension funds besides supervising Insurance and Banking institutions. Pension funds are invested with strict regulation from BaFin. Pension funds are discouraged from taking risky initiative and are bound by the regulatory authority to constantly fund 65% of its reserve. Pension funds are prevented from investing in companies or assets which are rated below investment grade in Germany and overseas.
Pension or Provident fund in Germany The first public pension fund system was introduced before 120 years by Chancellor Bismarck. The old Bismarck system was first reformed in 1957 by introducing PAYGOfinance system. The German pension system has flourished to be one of the most generous pension systems in the world with. Most German workers receive their entire retirement income from it. The pension fund cost is currently around 12% of German GDP. Recently there have been several infrastructural changes to the German pension system. The old style PAYGO public pension has been converted to multi-pillar system with the latest introduction of National Defined Contribution System (NDC). n 2009 the pension fund asset were worth more than EUR 110 billion. In total about 178 pension funds with total of 7.9 million members.
Although the German pension fund is known for their generosity but their core system is under threat from:
1) Negative incentive effect Incentive effect means changing worker¶s rate of work, saving, or investment caused by the offer of any benefit. The generous pension system in Germany is causing workers to retire early or save less money and hence is putting greater pressure on the funds. 2) Aging population
Quicker increase in life expectancy and very low fertility of 1.3 children per women is has caused a dramatic change in the German age structure and thus putting more pressure on their pension system.
3) Unification of East and West Germany
More than 16 million people of East Germany have been integrated into the social security system causing pressure on the overall fund.
The pillar system of German Pension Fund: Germany has three pillar pension system:
1. The first and the widely recognized pillar is the government provided public pension. It follows the pay-as-you-go system. This pillar is compulsory for all employed Germans. People with meager income of less the 400 EURO and students are excluded. Usually the public sector pension funds are regulated through µsectoral collective agreements¶. 80% of the pension paid to µold age payment¶ through first pillar.
2. The second pillar is the optional employment pension. These pension funds are organized by the companies (e.g. large motor or machine manufacturing plant). Sectoral agreements are not used in regulating voluntary pension. Five percent of the pension paid to µold age payment¶ is through second pillar. 3. The third pillar is optional private provision with a funding system Fifteen per cent of the pensions paid to µold age payment¶ are through third pillar.
Pension Fund utilization in Germany German pension fund is utilized in numerous ways to yield return. Pension funds are invested through asset management companies under strict supervision by asset managers. Most of the pension funds are held by specialized asset management companies in Germany. Pension funds are collected by the institutional investors and re invested in capital markets, bond market and debenture market. In Germany pension asset are utilized in two different methods as below:
1. Wholesale management Pension fund pooled together and managed on behalf of institutional investor 2. Retail management Pension fund directly invested by household into mutual funds, capital market etc... Investment companies in Germany then utilize pension fund to invest in domestic and foreign money generating products. For example in 2010 German pension fund management investor made investment of $120 million in INVESCO Real Estate in US.
Fund diversification and investment into risky instruments German pension funds are highly regulated monitored and are efficiently well funded. Funds are prevented from accumulating into high equity exposure. Even in certain cases the pension funds were prevented from investing in mild risky favorable stock market and thus limiting the potential to generate more revenue. The maximum level allowed to invest in risk taking asset is only 35%. Investing in equity, profit participation or investing in hedge funds are only considered risky and only 18% of the total fund are invested. In terms of risk equities are considered to be the most risky. In 2006 the Germany regulatory agency certified German pension fund to be healthy and in sound financial position. The investment from pension fund was increased by EUR 650 million from 2007. Recently the funds are invested in emerging market in Vietnam, Cambodia, India, China to get the most amount of return on the funds and thus lot of institutional investors managing the pension fund have set their offices in these places. Higher return from these investments means greater stability to the pension fund market and greater sustainability for the retirees and old age population dependent on the pension fund. Most of the funds are invested in non-quoted bonds and loans issued by banks or the government as they are safer and are regarded as low risk asset. Some institutions are currently pursuing more sophisticated investment strategy to invest the
pension fund into hedge funds and private equity. Pension funds are also invested in various types of multi-callable bonds for secured return. Pension Fund in Malaysia Employee Provident Fund Pension fund or more commonly known as Employees Provident Fund (EPF) ordinance by the Federal Legislative Council of Malaya on 1st October 1951 which set the scene for the creation of the EPF. EPF was the sixth statutory body to be created by the government of the day. The first contributions were received in August 1952, totaling $2.6 million which is a fraction of the total deposits of RM 407 billion. The staff increased from mere 46 people to 12 million members. In the early days EPF¶s withdrawal scheme was fairly rigid and a member was only allowed to take out all his savings when he reached 55 or when he is physically or mentally incapacitated. By 1963 the scheme was widened to include workers receiving up to $500 a month from employers with more than three staff. 1968 was a landmark year, with allowing workers to withdraw up to of their saving by reaching 50 years to purchase a house. This feature is still prevalent today. Every month, workers and their employers remit a percentage of the employee¶s salary to the fund - at present workers contribute a minimum of 11% an employer contribute 12%. Savings, investments and dividends EPF as the largest mobilize of savings has been an important source of non-inflationary finance for the public sector. During the early days of Malaysian economy, EPF fund was the single most important contributor to the development of the economy. Under the second and third Malaysia plans, EPF¶s fund was used to finance 43 per cent and 49.8 per cent respectively of the total borrowings by the government. Return generated by EPF since its beginning in 1951 is quiet positive with comparison to other developed nation. After the revision of the EPF act 1991, the institution moved further to invest its massive fund in to different kind of invest ranging from financing industries, promoting home ownership, providing limited social insurance. It is done to increase the benefit of its members. The EPF fund is invested with the regulation provided EPF Act 1991. According to this Act, the Fund is allowed to invest in government securities, equities, loans and debentures, money market instruments and property. It is required to keep a reserve of 70% of its fund with Malaysia Government Securities (MGS). With the fact that Malaysia having budget surplus for the last two decade, EPF has begun to diversify its portfolio in to more high yielding safe instruments.
EPF¶s dividend history shows annual dividend range ranged between 2.5 per cent to 8.5% and currently the rate is 5.8%. EPF has always managed to make sure the real rate dividend rate exceeds corresponding inflationary rate with the exception of only three years.
The table below list the EPF asset allocation from 1985 to 2000:
Graph displaying the movement of EPF allocation from 1990 to 2000
Some of the key roles of EPF in Malaysian economy As a provider of retirement benefits A source of domestic borrowing and financier of developmental and infrastructural projects As an institutional investor As a financier of Industries As a promoter of home ownership As a provider of limited social insurance As a promoter of thrift
Comparison and similarities among German and Malaysian pension fund The EPF and German pension fund have lot of similarities in terms of savings and investment. Both the countries funds are heavily monitored and regulated with tactical and wise approach so as not to take any big risk in investing in risky instruments. Both Germany and Malaysia must keep majority of the fund in reserve which is 70% for Malaysia and 65% for Germany. Both the countries pension system are generous in paying back to their members. The difference in investment among the two countries can be seen in contribution to the economic development. Malaysia has utilized lot of its fund up to 49% to fund for countries infrastructure development whereas in Germany has a negligible amount of contribution instead most the fund is invested in safe securities in capital market and government bonds. The differences found among the two countries are the age the pension could be received by its member and the future of the fund. For Germany at the age at which pension can be claimed is 65 and for Malaysia it is at 55. In terms of the annual dividend both the countries have a low yield and that is because the fund of the both these two countries are not exposed to risky but highly profitable instruments and assets. Both the country takes their pension fund as trust so high integrity is maintained and the EPF is managed with prudent approach so as to generate safer return. Last but not the least the differences between the two countries pension system is from the threat and opportunities. Germany with its aging population and lower fertility is putting much stronger pressure on its pension system whereas Malaysia¶s young vibrant emerging local and foreign workers are a boost to the pension fund which is growing steadily annually.
3. Co-operatives or Credit Unions
A cooperative is a business organization where group of members own and operate to reach a common mutual goal. Cooperatives or credit unions are usually autonomous association where individuals become members voluntarily to meet their purpose and demand. Cooperatives in Germany Cooperative was first introduced in Germany before 140 years due to economic and social distraction. The first saving and credit cooperative took savings and granted loans and that was the first microfinance institution besides saving banks in not only Germany but in the world. Currently there are 1,232 cooperative banks with 13,625 branches in Germany with 2 cooperative central banks. In total the no. of members exceeds 30.5 million. Turnover for 2010 was about EUR 98.2 billion. Today most of the German farmers, gardeners are member of cooperatives. In addition roughly 60% of all craftsmen, 70% of all baker and butcher and over 60% of all self employed are known to be cooperative members. Cooperatives in Germany are divided into five different type: 1. Cooperative Banks 2. Rural Raiffieisen cooperatives 3. Small scale industry commodity and service cooperative 4. Consumer Cooperative 5. Housing Cooperative
Table showing Cooperative Banks in Germany as of 2009
Aim of German cooperative is to provide its members with affordable service & easier access to the market. The operations are considered to be of mutual help, mutual administration and mutual responsibility. Members play double role in mobilizing the cooperatives. They are both capital owner and customer. Declining in no. of co-operative in Germany In spite of successful performance co-operatives in Germany are declining in last few years partly due to merging between cooperatives vastly due to changing economic environment. More people are now well off to get financing from commercial banks in order to invest in their businesses and in addition to declining rural based farming and business.
Performance of Credit Cooperatives in Germany
Regulation of Cooperatives in Germany Cooperative financial system are federally regulated as cooperative banks under German federal law. According to the rules provided by µGerman Bundesbank¶ (central bank of Germany), all cooperative financial institutions must maintain a deposit of 2.5% of their net asset as liquid. The deposit at central bank does not earn any deposit.
Cooperatives Malaysia Background Malaysian cooperatives are better known as credit unions and fall under savings institution who facilitate credit to its members at reasonable rate and thus mobilizing financial services among the general people who are its members.
Malaysian cooperatives are funded almost by its members and do not expose to external loans. Typically members are well bonded and are from one locality or business or farming area. The first co-operative movement was established before 90 years. Today the no. of registered co-operatives are 5,170 (as of 2007) with approximately 7 million members. Net asset held by these co-operatives are approximately RM 52 billion. There are two central cooperative banks in Malaysia namely Co-operative Central Bank and Bank Rakyat.
Cooperatives in Malaysia can be divided in to two segments. One catering for the flourishing urban segment that is financially sound and rural segment which mostly comprises of agriculture farming. Different types of cooperatives in Malaysia are listed below: 1. Consumer co-operatives 2. Co-operative housing societies 3. Land development co-operatives and 4. School co-operatives 5. Fishermen's co-operatives 6. Co-operatives under the government agencies
Malaysian Cooperative¶s role as an important financial institution Malaysian cooperatives has been showing positive growth from 1990 and onwards. From 1990 to 1997 the membership growth was about 3.1 per cent and the growth of capital and asset about 2.8%, 8.7% and 10% respectively. In 1997 co-operative movement was hurt due to Asian financial crisis. During the financial crisis co-operatives suffered from liquidity crisis but it recovered with the expansion of capital market following the recovery. From 1997-2000 growth of co-operatives were about 2.57 per cent, with membership at 1.8 per cent, capital growth of 10.47 per cent and asset growth of 1.8 per cent. From 2000 to 2007 the growth was 3.1 per cent, membership growth roughly 5 per cent, capital growth about 10% and asset growth about 17 per cent.
Co-operatives role in building Malaysian economy
Cooperatives played role in eradicating poverty in rural areas in Malaysia from its inception in Perak in 1923. The co-operatives were set to provide fund to farmers and peasants who were below poverty level. Cooperatives helped to break the exploiting of farmers by rural moneylenders. Rural cooperatives helped finance these farmers to start paddy and rubber planting. Slowly the farmers were able to save small amount of money and expand their business and increase their living standards. Thrift and loan society were set up to finance handicapped, orphans and single mothers to start small home enterprises. In addition Malaysian co-operatives are working towards increasing financial
services to eradicate the hard core poverty among Orang Asli (ethnic minority) and thus created Orang Asli Co-operatives.
Table showing the effect of cooperatives on poverty alleviation:
Regulation of Malaysian cooperative: The cooperatives in Malaysia are monitored and regulated by government agencies such as Federal land Development Authority (FELDA), FELCRA, RISDA. In addition the following authorities are working to regulate, promote and propagate co-operative throughout Malaysia: a) The Farmers' Organization Authority b)The Co-operative College of Malaysia c) The National Co-operative Organization of Malaysia d) The Ministry of Entrepreneur and Co-operative Development
German and Malaysian co-operatives in comparison and distinction The cooperatives in Malaysia and Germany share the same common objective of providing financial service to those who lack the ability to get loan from commercial credit institutions. In addition both the countries cooperative has wide scope of operation ranging from agriculture to industrial to housing finance to investment and underwriting of shares.
Several distinctions can be drawn between the two countries overall co-operative structure in terms of strength and weakness posed. They are as below:
Strengths: 1. Comprehensive protection scheme 2. Market position is ranked second after Universal Banks 3. Strong retail deposit 4. Strong capitalization 5. Merge between co-operatives when required · Weaknesses: 1. High cost of maintenance of the cooperative banks 2. Margin pressure due traditional financial product which requires further diversification 3. Not enough strategic leadership and execution
Strength: 1. Strong small and medium enterprise output 2. Strong retail deposit 3. Cooperative collaboration with neighboring countries (Thailand, Indonesia) and Australia to enhance the system. Weakness: 1. Weak governance. Corruption among cooperative management. 2. Less integration with technology in rural areas 3. Less educated members among cooperative society 4. Loan at more favorable and reasonable condition 5. Money lent is often to particular ethnicity because of local connection
Insurance provides a person (the insurer) guaranteed monetary compensation (indemnity) in exchange for a premium for specific losses like death, accidents and many other non-life business related incidents. It is used by individuals and businesses alike to protect themselves against losses when they are faced unfortunate accidents. The monthly premium is worth paying to cover for losses because an individual or the company will not have to pay the full amount (or any of it) when faced with an accident. This protects individuals and companies from significant and unforeseen losses and allows insurance companies to earn a lot using the premium paid by their customers. Insurance in Malaysia Prior to 1950, insurance in Malaysia was mainly offered by British insurance companies who took benefit of this since there were not any local insurance companies around. They established trading houses or branches of British insurance companies and acted as agents in Malaysia. After the country¶s independence during the late 1950s, the country¶s first main economic development initiated under Prime Minister Abdul Rahman and much effort was made to introduce local insurance companies. They gradually took over their British counterparts while still following the standards of the British insurance system. By the late 1980s, there were about 51 domestic insurance companies present in the country (Bank Negara, 1999). Insurance companies are regarded as financial institutions because of many reasons. One of them is the fact that they give financial protection to its members on substantial loss by means of accidents or any other means or related to life, non-life and financial incidents. The capital they receive is also invested in the capital market thus providing financial benefit to corporations in need of financing. The insurance sector in Malaysia is regulated by the Central Bank, Bank Negara Malaysia(BNM) with trade associations for each insurance type. It was established on January 26 1959, under the Central Bank of Malaya Ordinance, 1958. Types of insurance in Malaysia There are three types of insurance industries of companies in Malaysia. They consist of Life insurance companies, General (non-life) insurance companies and Takaful (Islamic) insurance companies. Life insurance ³insures the live of individuals, as well as provision of financial coverage against various disabilities and illnesses. To meet certain contingencies, the insurance companies may provide loans up to a certain percentage against the surrender values of
the respective policies to the insurer at appropriate interest rates. Various types of insurance policies are offered under term, endowment and whole life policies´(Pang, 1995). The trade association dealing with life insurance in Malaysia is called The Life Insurance Association of Malaysia (LIAM). General insurance ³cover the risk of non-life business, for example, loss of property or income arising from accidents, fire, burglary, theft and other unexpected events´(Pang: 1995). They also include motor car insurance, house insurance and other similar non-life business insurance. The trade association dealing with life insurance in Malaysia is called The Persatuan Insurans Am Malaysia (PIAM). Reinsurance insurance involves ³the spreading of risks by sharing the responsibility of coverage of life or general insurance business with other insurance companies´(Pang: 1995). Takaful Insurance ³was incorporated under the Takaful Act 1984 to provide family and general takaful (insurance) for cover against accidents and disasters in accordance with Islamic principles´(Pang: 1995). Takaful insurance is developed on three principles ³1) Mutual responsibility 2) Co-operation with each other 3) Protecting one another from any kind of difficulties, disasters and other misfortune...´(Abdul Hamid, Osman and Nordin, 2009) General Takaful cover fire, motor, accidents, personal accidents and other non-life incidents. The member only pays the amount for what he wants to be insured for. That amount is then assessed on the value of the asset to be covered. The member is told that if within one year, no claim for insurance is made, the profit made with the contribution he made will be shared with others. The members also agree that that Takaful insurance company will pay from the general pool of funds to any other fellow member who may suffer a loss. Family Takaful is an investment program for the family that provides halal compensation to family members when any of them dies prematurely. The money given is pooled regularly by their family members throughout the years.
The Takaful industry is doing very well. The following table shows an example of the growth of the industry, in particular, the Takaful Family Business growth.
Takaful Efficiency/Performance The Takaful Insurance industry is a means for the majority Muslim population of Malaysia to avoid interest in conventional insurance not allowed by Islamic law. The Takaful industry has been thriving since its inception after the Takaful Act 1984 enactment. The Malaysian Takaful market is the largest in the world according to Bank Negara Malaysia and ´had over one quarter of total international Takaful assets´(Gamser, 2011) which was more than 12 billion Ringgit in 2009. The total income from family Takaful insurance was about 4 billion Ringgit in 2010, an increase of 20% from its previous year. The performance of the Takaful industry in Malaysia currently shows no signs of decline and future projections of an increase of 12% look promising. The Takaful system is effective economically because it encourages families to invest their savings in the Family Takaful program while those collected funds are invested in the capital market. This will help the economy further by increasing greater utilization of resource and greater employment (Farooq, et.al, 2010). The initiation of Takaful companies complimented the start of Islamic Banks in Malaysia also helped Muslims to invest their money in a profitable manner instead of keeping all their money at homes to avoid interest. ³In sum, a Takaful company plays the role as
savings institution and a custodian of money deposited in its custody to serve the future interest of the Muslim community´(Farooq, et.al, 2010). Below is a graph that shows the performance of Takaful and its contribution in South East Asia and in particularly, Malaysia.
General Insurance Performances The General Insurance industry is also thriving and has no signs of decline as well. The executive director of the PIAM reported that general insurance grew by 9% in 2010 compared to its previous year with premium estimates of over $3 billion. LIAM also reported a 21% increase in the life insurance industry in 2010 compared to its previous year. In the last decade of the 20th century, the Malaysian insurance industry grew at a rapid pace. Total assets of the insurance industry as a whole grew by at an average annual rate of 18.6% reaching RM38,743.4 million which was more than five times the size of the same industry¶s assets in the late 1980s(Bank Negara, 1999)
SWOT of Malaysian Insurance Industry Strengths y y y y y Many old companies that currently exist have a lot of credibility because of being in the insurance industry for many years The industry has a lot of regulations meaning it is more controlled Malaysia is the undisputed leader of Islamic finance in the whole world Few barriers to entry A lot of local demand is increasing for insurance and its various types
Weaknesses y The insurance industry has a lot of competition
Opportunities y There aren¶t many partnerships of insurance companies with neighboring countries so this can be used as an opportunity for some insurance company to initiate this The growth of non takaful insurance like life and non-life insurance means that takaful will get more popular
Insurance in Germany Insurance in Germany is not only provided by insurance companies such as Allianz but also by banks. It is more heavily regulated than banks and insurance is often provided by insurance companies. The German insurance industry is very big and consists of one the biggest insurance companies in the world. It consists of two types of insurance: 1) Life Insurance ± called ³Risiko-Lebensversicherung´ is similar to life insurances in many European and Western countries. It gives the family of the insured person a fixed compensation when the insured person dies. is the fifth largest in the world in terms of premium received 2) Non-life insurance (general) consists of Property(Hausratversicherung), accident, health related insurance and other related general insurance. Allianz, a German general insurance company is the largest property insurance company in the world. A distinguishing feature of the German Insurance sector is that they allow a high level of integration between insurance companies and the banks. The Germans started this concept and called it µAllfinanz¶. Another feature is that the German insurance industry must make a clear distinction between life insurance and other types of insurance. The Germany insurance market is achieving growth as can be seen from the table and chart below:
Germany Insurance SWOT
Strengths y y y The Insurance industry is very well regulated so its controllable and properly governed The local market is very big and provides economies of scale The German economy is the largest in Europe and produces one of the best quality goods meaning if the economy is strong, the insurance market will be strong
Weaknesses y y The local insurance market is old now and growth is slow The progress of German banks is bad and they are vulnerable to a crisis
Opportunities y Germany¶s reinsurance market is unassailable
Germany is a major player on the world stage. Its major financial institutions are well placed strategically and in terms of capital strength to exploit expansion opportunities in both developed and emerging markets
Threats y Expensive oil prices have a bad impact on Germany¶s economy which depends on the country¶s manufacturing department and that in turn depends on the price of oil
5. Building Society
Germany Housing Credit Institutions In Germany, housing loans or house related financing is provided by ³Bausparkassen´ institutions. These institutions give out loans to µBauspar´ customers after they have made bauspar deposits to the Bausparkassen institution. When these members make a deposit, they enter a Bauspar contract and are eligible for a Basupar loan legally for their house financing. In other words, the Bausparkassen credit institution is like a mutual building society where members are given out loans to buy houses using other members¶ pooled deposits. They are mutual building societies because its money is lent by its members and the same members are also eligible for loans. Only the Bausparkassen institutions are allowed to give out house related loans and house financing in Germany. Currently, 23 Bausparkassen institutions exist in Germany with 10 of them being public, which only operate within specific region in Germany, and the other 13 being private, which operate in the whole country. The public Bausparkassen can be public banks, public companies or other incorporated institutions. The private Bausparkassen exist only as public limited companies. How Bauspar contract/loans work The methodology of giving out loans is divided into four phases: 1) The Contract Conclusion phase 2) The Savings phase 3) The allocation phase 4) The loan phase In the first and second phase, the Bausparkassen financial institution and the Bauspar customer agree on the amount of loan required, the savings, the loan interest rate(often between 1.5 % and 4.25%) and the contract conditions. The second phase is when members deposit their savings in the institution gradually until their savings reach 40% or 50%. The allocation of the loan begins in the third phase after a certain minimum savings period has passed after looking at the valuation index. The valuation index rates the member¶s performance based on their savings deposited and the length of time it existed in the institution. The longer the savings stay, the better the valuation. The member with the higher valuation index is given preference over the one with a lower valuation index
when it comes to giving out loans in the agreed amount. After the allocation is done, the loan is given out consisting of other peoples¶ deposits with a fixed interest rate which needs to be given until the loan is paid back.
The economic effects of the Bauspar system
The Bausparkassen institutions have helped and still continue to help its economy in the long run. It helps the German population to buy their own homes privately without getting the Government involved, making it easy for the state. It also helps the country to create homes at a consistent rate for its citizens because of its ease. Since its initiation, the Bausparkassen institutions have allocated more than one trillion Euros and also help to restrict price hikes in the housing market. The Bausparkassen institutions help the state relieve the burden of house ownership given to retired employees. Because of its success, it is helping to stabilize the finance system of the country and is helping the economy to grow with increasing government revenue. Many private banks and insurance companies have also learned the importance of the Bausparkassen and have invested in acquiring shares in existing Bausparkassen or founded new Bausparkassen institutions.
Malaysia Housing Credit Institutions The Malaysian Government has ensured that every family, particularly the lower class population is able to own a house. The Malaysian Government has also tried its best to construct low-cost houses for the poorer class as well. Malaysia has only two credit housing institutions in the private sector, the Malaysia Building Society Berhad and the Borneo Housing Mortgage Finance Berhad. In the public sector, the Housing Loans Division of the Treasury provides house financing the government¶s employees. The Malaysia Building Society Berhad
Originally known as Malaya Borneo Building Society Limited, they were the first building society to be established in the private sector in 1950. Up to this day, they provide housing loans to the general population in need. To meet the local public¶s demand of
housing loans, the funds are primarily taken from the loans from the EPF as aforementioned.
Borneo Housing Mortgage Finance Berhad The Borneo Housing Mortgage Finance Berhad started in 1958 and its activities are similar to the Malaysia Building Society Berhad but its operations are addressed to the population located in the Sabah and Sarawak regions located in East Malaysia. CAGAMAS
Although not a house credit institution in the traditional sense where institutions gather money from its member¶s deposits and give them out as loans, rather, CAGAMAS buys housing loans from the financial/credit institutions and issues them as debt securities to investors. Investors include insurance companies, pension funds, financial institutions and whoever else is interested in earning the income from these securities. CAGAMAS is the only institution that provides this type of security in Malaysia. CAGAMAS is considered a part of the secondary mortgage market and not the primary (building societies) because buyers of loans from building societies sell their loans to CAGAMAS and they in turn sell it to investors for financing these loans. Comparison
Germany housing loans can only be granted by Bausparkassen institutions whereas in Malaysia, housing loans can be given by banks as well as other institutions like commercial banks and so on. In Malaysia, the two housing institutions are private while in the Public sector, the Housing Loans Division of the Treasury provides loans separately for Government employees. That is not the case in Germany, the Bausparkassen institutions provide for all citizens of the country. The Bausparkassen also has a public and private version of it just like how Malaysia has both a public and private housing institution. Both countries¶ housing institutions are very different but work in a similar way in the end with the exception of CAGAMAS, which is a very different type of means for housing loans and is not available in Germany.
The 21st Century had lots of ups and downs in terms of financial health. Recent subprime crisis in US and melting of many financial giants led many to ponder about the viability, effectiveness of the current financial system. Germany, Malaysia just like other countries are twined with the global financial net. Any abnormalities among the system will directly or indirectly affect the financial system either partially or completely. At certain point controlling the financial system triggers out of human capacity but strong monitoring and regular implementation of more sophisticated system will help sustain blows from the global tsunami. Financial institutions are an integral part of the financial system that has crucial job in increasing economic activity by mobilizing fund. Mobilizing fund in the correct direction is of outmost importance as some of the recent US subprime crisis has been caused by failure of financial institution to make cautious judgment and prudent decision making. The report has widely discussed the financial institutions above discussed financial intermediaries and their role in wider economy of their respective country. It has pinpointed some of the inefficiency lingering in German financial system especially in commercial banking, future of pension fund and declining cooperatives. The report has also inculcated the strengths of Malaysian financial institutions especially role of EPF in investing in the development of the country¶s infrastructure. Also the collaboration of cooperatives to alleviate rural poverty in Malaysia is highly appreciated. The report found that the insurance industries of both the two countries are doing good and the positive impact is directly related to the welfare of the economies of the two countries. Stronger insurance helps industries to safeguard from hazard and thus engage in greater business activities not done before and hence positively benefiting the economy. Introduction of Takaful has been able to attract customers who never had any form of insurance and thus increasing market base for insurance in Malaysia. The report found no decline in the business of housing societies in both Germany and Malaysia in times when United States suffered and suffering from serious crisis in housing sector. Cagamas of Malaysia is doing extremely well and increasing its reach every year. The importance of housing and building society is immense to the economy as the backward linkage of housing and building society is very broad.
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