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FINANCIAL SYSTEM IN

MALAYSIA TOPICS TO STUDY: 1. EVOLUTION OF THE FINANCIAL SYSTEM 2. DEVELOPMENT OF FINANCIAL SYSTEM IN
MALAYSIA
TOPICS TO STUDY:
1.
EVOLUTION OF THE FINANCIAL SYSTEM
2.
DEVELOPMENT OF FINANCIAL SYSTEM IN
MALAYSIA
3.
ROLES OF THE FINANCIAL SYSTEM
4.
STRUCTURE OF THE FINANCIAL SYSTEM
5.
ASSETS, SOURCES & USES OF FUND OF
FINANCIAL SYSTEM
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EVOLUTION OF THE FINANCIAL SYSTEM BARTER TRADE TO MONETARY SYSTEM When the economy moves from a
EVOLUTION OF THE FINANCIAL
SYSTEM
BARTER TRADE TO MONETARY SYSTEM
When the economy moves from a barter trade
system into a monetary system, commodity money
was used as the basic transmission unit.
Under this system, tokens, often made of precious
metals served as a standard unit of account and
measures of value to facilitate trade.
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EVOLUTION OF THE FINANCIAL SYSTEM SAVING AND BORROWING PRACTICES  When the practice of borrowing began.
EVOLUTION OF THE FINANCIAL
SYSTEM
SAVING AND BORROWING PRACTICES
When the practice of borrowing began. Funds
accumulated by wealthy persons were loaned to
other individuals or companies who were willing
to pay for these funds for a fee or interest.
This is where those economic units who are in
need of funds “deficit” units came to terms with
those who have excess funds to be lent out or
called “surplus” units.
At this stage, however, there are some problems
such as the difference in amount, maturity and
the element of risks.
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EVOLUTION OF THE FINANCIAL SYSTEM ESTABLISHMENT OF FINANCIAL INTERMEDIARIES  The establishment of financial intermediaries to
EVOLUTION OF THE FINANCIAL
SYSTEM
ESTABLISHMENT OF FINANCIAL INTERMEDIARIES
The establishment of financial intermediaries to
overcome the problems of primary debt in the direct
borrowing-lending process.
During this stage, financial intermediaries mobilize from
the surplus units and reduce their risk of default by
issuing relatively risk-free liabilities.
At the same time, through their specialized knowledge of
the credit market, they were able to supply funds to
deficit units in the amount and terms that these units
were willing to pay to meet its financing needs.
The liabilities of these financial intermediaries are known
as secondary or indirect debt.
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EVOLUTION OF THE FINANCIAL SYSTEM VARIED FINANCIAL INSTRUMENTS In of Malaysia, the country can be considered
EVOLUTION OF THE FINANCIAL
SYSTEM
VARIED FINANCIAL INSTRUMENTS
In of Malaysia, the country can be considered to have
arrived at the final stage of the evolution process in
establishing a complete monetary system
When a complete set of financial intermediaries were
established
A financial system which provide a variety of
financial instruments as saving media for the surplus
units
As well as a varied range of credit and investment
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facilities to meet the financing requirements of the

DEVELOPMENT OF FINANCIAL

SYSTEM IN MALAYSIA

First phase

1960s , to create the basic infrastructure for the financial system and to develop a truly Malaysian-oriented banking system to complement the presence of strong foreign banking in the economy

Second phase

1970s, BNM’s efforts were focused on introducing other financial intermediaries such as Merchant bank and Credit Guarantee Corporation and also to strengthen the regulation and supervision of banking institutions through develop the enactment of a new

legislation, the Banking Act 1973.

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DEVELOPMENT OF FINANCIAL

SYSTEM IN MALAYSIA

Third phase

1980s, BNM’s efforts were focused on further strengthening the regulatory and supervisory framework for the banking system by re-

regulation and significant structural changes in the banking system

due to lessons from domestic development as well as the global

recession in the early 1980s.

Fourth phase

The 1990s was characterized by rapid changes shaped by the forces of liberalization and globalization, aided by technology which broke new frontiers in the functioning of financial markets and in the development of financial products.

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DEVELOPMENT OF FINANCIAL SYSTEM IN MALAYSIA *

Fifth phase ??

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ROLES OF FINANCIAL INSTITUTIONS

AND FINANCIAL INTERMEDIARIES IN

THE DEVELOPMENT OF COUNTRY

  • Intermediation function

  • Operation of the payment system

  • As a channel for transmission of monetary policy

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THE FLOW OF FUNDS IN AN ECONOMY SOURCES OF FUNDS USES OF FUNDS FINANCIAL FINANCIAL FINANCIAL
THE FLOW OF FUNDS IN AN ECONOMY
SOURCES OF FUNDS
USES OF FUNDS
FINANCIAL
FINANCIAL
FINANCIAL
INTERMEDIARI
-SAVINGS /
INVESTMEN
-
INSTRUMENT
INSTRUMENT
ES
INVESTMENT/
S
T-
S
Money at call
EXPENDITUR
Currency
Central bank
SURPLUS
E-
Deposits
Commercial
UNIT
Bills
banks
Overdrafts
Bills
Term loans
Hire purchase
Bridging loans
Leasing
Securities
Bonds
Debentures
External reserves
DEFICIT UNIT
HOUSEHOLD
HOUSEHOLD
Loans
Bonds
ENTERPRISE
Unit trusts
Finance
companies
Merchant banks
Discount houses
Industrial Fin.
Inst.
Saving inst.
Provident funds
Pension funds
Insurance
companies
Unit trusts
Building societies
Cooperatives
Other fin. inst.
ENTERPRISE
Share capital
Insurance
GOVERNMENT
GOVERNMENT
premiums
INTERNATIONAL
Provident funds
Pension funds
Foreign loans
Investments
INTERNATIONAL
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FUNDS FLOW THROUGH THE FINANCIAL SYSTEM 1 by Snurazani 2 Mustaffa/2011
FUNDS FLOW THROUGH THE
FINANCIAL SYSTEM
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THE FINANCIAL SYSTEM STRUCTURE IN MALAYSIA 1 3 zani Mustaffa/2011
THE FINANCIAL SYSTEM STRUCTURE IN MALAYSIA
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IMPORTANCE OF FINANCIAL MARKETS

  • Financial markets improve individual participants by providing investment returns to lender-savers and profit and/or use opportunities to borrower-spenders

  • In the absence of FI, difficult to transfer funds from savers to entrepreneur status quo or even worse off.

  • Financial markets are critical for producing an efficient allocation of capital, which contributes to higher production and efficiency for the overall economy

  • Improve well being of consumers by allowing better timing of purchases.

  • Overall: Well-functioning financial markets improve the economic welfare of every segment in the society

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5. STRUCTURE OF FINANCIAL MARKETS

How to categorize financial markets? In terms of:

How to obtain funds: Debt and equity markets

  • Type of markets: Primary and secondary markets

  • Types of secondary market trading: Exchange and Over-the-counter markets

  • Types of maturities: Money and capital markets

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STRUCTURE OF FINANCIAL MARKETS How funds are obtain in the financial markets? Debt and equity markets
STRUCTURE OF FINANCIAL MARKETS
How funds are obtain in the financial markets? Debt and equity markets
1.
Issue debt instrument – A contractual agreement by the borrower to pay
the holder of the instrument fixed dollar amounts at regular intervals until
a specified date, when the final payment is made.
Buyers of debt instruments are suppliers (of capital) to the firm, not
owners of the firm
Debt instruments have a finite life or maturity date. Maturity:
Number of years until the instrument’s expiration date
Short-term (maturity < 1 year) = Money Market; Intermediate-term
(maturity between 1 to 10 years); Long-term (maturity > 10 years)
=Capital Market
Advantage is that the debt instrument is a contractual promise to pay
with legal rights to enforce repayment
Disadvantage is that return/profit is fixed or limited
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STRUCTURE OF FINANCIAL MARKETS How funds are obtain in the financial markets? Debt and equity markets
STRUCTURE OF FINANCIAL MARKETS
How funds are obtain in the financial markets? Debt and equity
markets
2.
Issue equity - Claims to share in the net income and assets of a
business
Periodic payments in the form of dividends to holders and have
no maturity date
Example: Common Stock
Own a portion of the firm and have voting rights on important
issues to the firm and elect its directors
Buyers of common stock are owners of the firm
Common stock has no finite life or maturity date
Advantage of common stock is potential high income since
return is not fixed or limited
Disadvantage is that debt payments must be made before
equity payments can be made
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OTHER CLASSIFICATIONS OF FINANCIAL MARKETS 1. Primary Market  New security issues sold to initial buyers.
OTHER CLASSIFICATIONS OF FINANCIAL MARKETS
1.
Primary Market
New security issues sold to initial buyers. Example: Government
or corporation borrowing funds issuing bonds and stocks to
buyers
Investment bank assists in the sale of securities in the primary
market. Involves underwriting: guarantees a price for a
corporation’s securities and sells them to the public.
2.
Secondary Market
Securities previously issued are bought and sold (resell)
Examples: KLSE, NYSE, NIKKEI and bond markets.
Brokers: agents of investors who match buyers with sellers of
securities. Dealers: link buyers and sellers by buying and selling
securities at stated prices.
2 important functions: Make it easier to sell the financial
instruments (liquidity) & Determine the price of the security
that the issuing firm sells in the primary market
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OTHER CLASSIFICATIONS OF FINANCIAL MARKETS 2 ways to organize a secondary market: 1. Exchanges  Trades
OTHER CLASSIFICATIONS OF FINANCIAL MARKETS
2 ways to organize a secondary market:
1.
Exchanges
Trades conducted in central locations: Buyers & sellers meet in
one central location (e.g., New York Stock Exchange)
2.
Over-the-Counter (OTC) Markets
Dealers at different locations buy and sell
Have an inventory of securities to sell OTC to anyone who comes
to them and is willing to accept their prices.
Very competitive
Basis of maturity:
1. Money market: financial market in which only short-term debt
instruments are traded
2.
Capital market: financial market in which long-term debt and equity
instruments are traded
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ASSETS OF THE FINANCIAL SYSTEM Banking system Non Banking system/ Non Bank Financial Intermidiaries •Bank Negara
ASSETS OF THE FINANCIAL
SYSTEM
Banking system
Non Banking system/
Non Bank Financial
Intermidiaries
•Bank Negara
•Banking Institution
(Commercial Bank, Finance
Companies, Merchant Banks)
•Discount House
•Provident and Pensions Funds
•Insurance Funds
•Development Finance
Institutions
•Saving Insiutions
•Other Non-Bank Financial
Intermidiaries
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SOURCES & USES OF FUNDS OF FINANCIAL SYSTEM • Capital, reserve & profit • Currency •Demand
SOURCES & USES OF FUNDS OF
FINANCIAL SYSTEM
• Capital, reserve
& profit
• Currency
•Demand
deposits
•Borrowings
• etc.
•Currency
•Deposits
•Bills
•Loan &
Advances
•Securities
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REGULATION OF FINANCIAL SYSTEM

  • Three main reasons for regulation

    • 1. Increase Information to Investors

    • 2. Ensure the Soundness of Financial Intermediaries

    • 3. Improve Monetary Control

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REGULATION OF THE FINANCIAL SYSTEM 1. To Increase Information Available to Investors • Asymmetric information in
REGULATION OF THE FINANCIAL SYSTEM
1.
To Increase Information Available to Investors
• Asymmetric information in financial markets means that
investors may be subject to adverse selection and moral
hazard problems that may hinder the efficient operation of
financial markets and may also keep investors away from
financial markets
• The Securities and Exchange Commission (SEC) requires
corporations issuing securities to disclose certain information
about their sales, assets, and earnings to the public and
restricts trading by the largest stockholders (known as
insiders) in the corporation
• Such government regulation can reduce adverse selection
and moral hazard problems in financial markets and
increase their efficiency by increasing the amount of
information available to investors
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REGULATION OF FINANCIAL SYSTEM 2. To Ensure the Soundness of Financial Intermediaries •Because providers of funds
REGULATION OF FINANCIAL SYSTEM
2.
To Ensure the Soundness of Financial Intermediaries
•Because providers of funds to financial intermediaries may not be able
to assess whether the institutions holding their funds are sound or not,
if they have doubts about the overall health of financial intermediaries,
they may want to pull their funds out of both sound and unsound
institutions, with the possible outcome of a financial panic that
produces large losses for the public and causes serious damage to the
economy
•To protect the public and the economy from financial panics, the
government has implemented six types of regulations:
Restrictions on Entry
Disclosure
Restrictions on Assets and Activities
Deposit Insurance
Limits on Competition
Restrictions on Interest Rates
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Ensuring Soundness of Financial Intermediaries  Restrictions on Entry  Regulators have created very tight regulations
Ensuring Soundness of Financial
Intermediaries
Restrictions on Entry
Regulators have created very tight regulations as to who is
allowed to set up a financial intermediary
Individuals or groups that want to establish a
financial intermediary, such as a bank or an insurance
company, must obtain a charter from the state or the
federal government
Only if they are upstanding citizens with impeccable
credentials and a large amount of initial funds will they be
given a charter.
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Ensuring Soundness of Financial Intermediaries  Disclosure Requirements: There are stringent reporting requirements for financial intermediaries
Ensuring Soundness of Financial Intermediaries
Disclosure Requirements: There are stringent reporting
requirements for financial intermediaries
Their bookkeeping must follow certain strict principles,
Their books are subject to periodic inspection,
They must make certain information available to
the public.
Deposit Insurance: The government can insure people providing
funds to a financial intermediary from any financial loss if the
financial intermediary should fail
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Ensuring Soundness of Financial Intermediaries  Restrictions on Assets and Activities: There are restrictions on what
Ensuring Soundness of Financial Intermediaries
Restrictions on Assets and Activities: There are restrictions on
what financial intermediaries are allowed to do and what
assets they can hold
Before you put your funds into a bank or some other such
institution, you would want to know that your funds are
safe and that the bank or other financial intermediary will
be able to meet its obligations to you
One way of doing this is to restrict the financial
intermediary from engaging in certain risky activities
Another way is to restrict financial intermediaries from
holding certain risky assets, or at least from holding a
greater quantity of these risky assets than is prudent
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Ensuring Soundness of Financial Intermediaries  Limits on Competition: Although the evidence that unbridled competition among
Ensuring Soundness of Financial Intermediaries
Limits on Competition: Although the evidence that unbridled
competition among financial intermediaries promotes failures that
will harm the public is extremely weak, it has not stopped the state
and federal governments from imposing many restrictive regulations
In the past, banks were not allowed to open up branches in other
states, and in some states banks were restricted from opening
additional locations
Restrictions on Interest Rates: Competition has also been inhibited
by regulations that impose restrictions on interest rates that can be
paid on deposits
These regulations were instituted because of the widespread belief
that unrestricted interest-rate competition helped encourage bank
failures during the Great Depression
Later evidence does not seem to support this view, and restrictions
on interest rates have been abolished
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REGULATION OF FINANCIAL SYSTEM 3. To Improve Monetary Control  Because banks play a very important
REGULATION OF FINANCIAL SYSTEM
3.
To Improve Monetary Control
Because banks play a very important role in determining the
supply of money (which in turn affects many aspects of the
economy), much regulation of these financial intermediaries is
intended to improve control over the money supply
One such regulation is reserve requirements, which make it
obligatory for all depository institutions to keep a certain
fraction of their deposits in accounts with the Federal Reserve
System (the Fed), the central bank in the United States
Reserve requirements help the Fed exercise more precise
control over the money supply
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To enable the Bank to meet the objectives of a central bank, it is vested with comprehensive legal powers under the following legislation to regulate and supervise the financial system. ***

  • Exchange Control Act 1953

    • Allows the bank to confer powers, and impose duties and restrictions in relation to gold, currency, payments, securities, debts, and the import, export, transfer and settlement of property, and for purposes connected with the matters aforesaid. [

  • Central Bank of Malaysia Act 1958

    • Provides the establishment, administration and powers of the bank. This act has been repelled with Central Bank of Malaysia Act 2009 starting on 25 November 2009. [

  • Central Bank of Malaysia Act 2009

    • Redefined the central bank roles which was not covered in the previous

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act. The central bank can now define monetary policy autonomously through Monetary Policy Committee. The bank also now have greater regulatory reach and oversight than before. The act also give recognition that conventional and Islamic Banking is running in parallel in Malaysia.

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  • Takaful Act 1984

    • Provides regulation for takaful business in Malaysia

  • Insurance Act 1996

    • Provides licensing and regulations for insurance business and financial advisory business.

  • Money-Changing Act 1998

    • Gives the bank the power to license and regulate money changing business in Malaysia.

  • Anti-Money Laundering and Anti-Terrorism Financing Act 2001

    • This act is actually renamed from a previous act. The act provides powers to the bank to prevent money laundering and terrorism financing.

  • Development Financial Institutions Act 2002

    • Promotes the development of effective and efficient development

financial institutions.

  • Payment Systems Act 2003

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  • Regulations of payment systems.

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  • Islamic Banking Act 1983

    • Provides licensing and regulations of Islamic banking in Malaysia

  • Banking and Financial Institutions Act 1989 (BAFIA)

    • Provides laws regarding licensing and regulation of banking institutions in Malaysia.

  • The Offshore Banking Act 1990

    • Governs the activities of offshore banking and offshore investment banking.

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You should know these 3 acts, you may refer the

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notes

STEPS TAKEN TO DEVELOP

FINANCIAL SYSTEM IN MALAYSIA

  • 1. Leveling the playing field

  • 2. Interest rate reforms

  • 3. Institutional development

  • 4. Consolidation and restructuring of the financial system

  • 5. Payment system

  • 6. Prudential and regulatory reforms

  • 7. Liberalization of the financial sector

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STEPS TAKEN TO DEVELOP

FINANCIAL SYSTEM IN MALAYSIA

  • 1. Leveling the playing field

    • Several measures were introduced during the period of 1989-99 to level the playing field to allow commercial banks, finance companies and merchant banks to compete on equal ground with each other.

    • A standard ratio for Statutory Reserve Requirement (SRR) has been adopted as the uniform method of capital adequacy assessment of three groups of banking institutions.

    • The aim is to enhance the competition among the three groups of banking institutions which essentially engaged in the same type of business.

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2. Interest rate reforms

  • The pegged deposit rate arrangement was dismantled in 1987.

  • Meanwhile, with effect from 1 st February 1991, the base lending rate (BLR) of the banking institutions was completely freed from administrative control,

with banking institutions allow to charge a

maximum of 4 percentage points above their

declared BLR.

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3. Institutional development

  • International Offshore Financial Centre (IOFC) was established on 1 st October 1990 in Labuan. The IOFC conducts a variety of international banking, insurance and investment activities.

  • As part of the institutional building to develop the capital markets, BNM initiated the establishment of the Securities Commission (SC) on 1 March 1993.

  • BNM also developed the private debt securities market and the Rating Agency Malaysia Berhad (RAM) to rate debt issues by corporations.

  • On 15 th December 1995 - KLOFFE’s stock index futures contract

  • Free Banking Scheme in March 1993

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4. Consolidation and restructuring of the financial system

  • BNM to restructure the banking system following the banking crisis in the mid-1980s.

  • While the banking sector entered the financial crisis in 1997 from a position of strength, the severity of the crisis weakened the health of the banking sector, as reflected in the deterioration in capitalization and asset quality.

  • BNM adopted a pre-emptive and comprehensive four- pronged plan to restructure the financial system.

a strategy to consolidate the finance company industry, and establishing Danaharta, Danamodal and Corporate

Debt Restructuring Committee to deal with the emerging problems of weakening asset quality and capitalization, as well as corporate debts, respectively.

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5. Payment system

  • BNM launched the payment system masterplan in 1996 to chart the development and implementation of payment system in Malaysia.

  • The masterplan was formulated along the lines of the four major modes of payment instruments, namely, cash, cheques, card-based payment instruments and electronic-based payment mechanism.

  • The forces of financial globalization and rapid technological advancements have also provided the momentum for the promotion for payment mechanism that are inexpensive, secure, reliable and efficient.

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6.Prudential and regulatory reforms

  • The introduction of the Banking and Financial Institution Act 1989 (BAFIA) in October 1989

  • BAFIA provides a framework for an integrated

supervision of the Malaysian financial system and enhances the powers and duties of the auditors of licensed institutions and made a director, officer or

controller of a licensed institution liable to indemnify

the institution in full for any loss or damage in any

form arising from or caused by on offence committed by any person.

  • Transfer of regulation and supervision of the insurance industry to BNM with effect from 1 st May

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1988

7.Liberalization of the financial sector

  • Malaysia recognizes that the opening up of the domestic financial sector to foreign competition would contribute towards a more efficient, competitive and market-driven financial sector, thus enabling the sector to play a more efficient and effective role in the economy.

  • At the same time, it is recognized that for the benefits of liberalization to be fully realized, the pace of liberalization has to be in tandem with the capacity and ability of the system to absorb these changes without undermining financial stability.

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  • This policy has resulted in a high foreign participation in the Malaysian financial sector.

Tutorial:

1. Find the history and functions in banking systems:-

  • Islamic Banking Act 1983

  • Banking and Financial Institutions Act 1989 (BAFIA)

  • The Offshore Banking Act 1990

2. What are those steps involved to develop financial system in Malaysia? Explain briefly.

3. Explain and give 3 examples of institution under:-

  • Commerce Banks

  • Merchant Banks

  • Finance Companies

  • Discount Houses

##Try to use variety resources (internet, library

etc) and state the references in your answers.

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