Lecture Central Bank of Malaysia

Part 4
Central Banking
and the
Conduct of
Monetary Policy
CENTRAL BANK OF MALAYSIA
(BANK NEGARA MALAYSIA)
CHAPTE
R2
1
Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-1
SPECIFIC OBJECTIVE OF TOPIC
• At the end of the unit you will be able to :

– Explain the formation of Bank Negara Malaysia
(BNM)
– Explain the system’s objectives and the functions
of BNM.
– Explain the organizational structure of BNM, two-
tier regulatory system, the BNM and
International Institutions relationship and the
direction of credit- credit guidelines.
2
SPECIFIC OBJECTIVE OF TOPIC
• At the end of the unit you will be able to :

– Explain the objective and the monetary policy
instruments
– Explain the techniques that are used by BNM in
influencing the fund supply, credit and interest
through monetary control-statutory reserve
requirements (SRR), liquidity requirements (LR),
interest rate management, money market
operations, discount operations and moral
suasion.
3
Formation of Bank Negara
Malaysia
• Bank Negara Malaysia (BNM) of Malaya

Ordinance 1959 (CBO) which established
the BNM was enforced on January 26,
1959.
• The establishment of BNM in 1959 can be

fundamentally attributed to the recognition
then for the need for deliberate
management of the money and credit
situation in the country.
4
BANK NEGARA MALAYSIA
• Bank Negara Malaysia is entrusted with the

task of overseeing the nation's economic
and financial system.
• Committed to promoting monetary stability
and to foster a sound and progressive
financial sector to achieve sustained
economic growth for the nation.

• Being a Central Bank in an emerging

economy,
– Bank Negara Malaysia also places high
importance in its developmental role with respect
to economic management, institutional building
and the development of the financial system
infrastructure.

• Bank Negara Malaysia is managed by a

team led by Tan Sri Dr. Zeti Akhtar Aziz, a
highly regarded Governor by the financial
community.
• Completing the management team are 3

Deputy Governors and 7 Assistant
Governors, who together provide a clear
strategic blueprint for the long term
development of the Bank.

GAVENORS
• Since May 2000

Tan Sri Dato' Sri Dr. Zeti
Akhtar Aziz
• Section 9 (1) of the Central Bank of

Malaysia Act 1958 provides that the
Governor shall be appointed by the
Yang Di Pertuan Agong, and the
Deputy Governors by the Minister
of Finance. Since the Bank's
inception in 1959, there has been
seven Governors.
• The policy of the Bank is entrusted to its Board of
Directors
 Consists of ten members.

 The ex-officer members of the Board are the
Governor, the Deputy Governors and the
Secretary-General to the Treasury.
 The other directors are prominent leaders who have
vast experience in the public and private sectors.
 All members, except the Deputy Governors, are
appointed by His Majesty the Yang Di-Pertuan
Agong. The Deputy Governors are appointed by the
Minister of Finance.
 The Governor, or in his or her absence, one of the
Deputy Governors, is the chairman of the Board,
which is statutorily required to meet at least once a
The Objectives of BNM
to issue currency and keep reserves while

safeguarding the value of the currency.
to act as a banker and financial adviser or

agent to the Government.
to promote monetary stability and a sound

financial
structure.
to influence the credit situation to the

advantage of the country.
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Copyright ©2015 Pearson Education, Inc. All rights reserved.
1
9-10
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The Functions of BNM
Bank for Currency Issue

 arrange for the printing of currency notes and
the minting of coins.
 issue, re-issue and exchange notes and coins at
its office and at such agencies as it may, from time
to time and establish or appoint
 arrange for the safe custody of unissued stocks
of currency and for the
preparation, safe custody and destruction of
plates paper for the printing of
notes and of dies for the minting of coins.
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Keeper of International Reserves
The country’s official external reserves are held and
maintained by BNM.
 Gold
 Foreign exchange assets and reserve in
International Monetary Fund (IMF)
 Holdings of Special Drawing Rights
 investments denominated in the major
international currencies, such as bank
balances, Treasury Bills, Bonds and other
appropriate term securities to secure the best
result
countryand returns/benefits
201 for the 10
Government Banker and Financial Advisor
(i) Management of Government Accounts
It provides cheque facilities, accepts funds and makes
payments on behalf of the government and undertakes the
foreign exchange business of the government
(ii) Source of Funds to Government

It provides temporary advances to the Government to cover any
deficit in the budget revenue.
(iii)Management of National Debt

It advises the government on its loan programmes, including
terms and timing of loans and the issue of new types of
securities.
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3
To Promote Monetary Stability and

Influence the Credit Situation to the
Advantage of the Country.
•BNM is obliged to ensure that the supply of money
and the volume of credit are sufficiently elastic to the
demands in the domestic economy without creating
undue pressure on resources.
•Influence the level of inflation

•Promote saving deposit
•Preserving price stability
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N
•Sustaining economic growth
4
Banker to the Banks

• Promote a sound financial structure
• Licensing of banks and non-banks
• Banking relationship
• Currency distribution
• Inspection and investigation of banks and
non banks
• Lender of the last resort
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5
SELECTIVE INSTRUMENTS
GENERAL
INSTRUMEN
TS
Selective instruments General
of monetary control instruments of
are used to monetary control
influence credit to a are those that
particular sub- operate to
sector or type of influence the
lending
MONETARY level of bank
POLICY 1.
reserves
INSTRUMEN Statutory
Reserve
1.Interest TS Requirement
Rate (Loan 2. Minimum
& Leiquidity
Deposits) Requireme
2.Credit nt
Control & 3. Money
Market
Lending
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N Guideline
Operation
4. Discount 14
9-16
• Under Section 37(1)(c) of the Central Bank
Ordinance, the banking institutions are required to
maintain a certain percentage of their reserves with
BNM.
• SRRis known as a bank’s eligible liabilities (EL). The EL

foundation comprises of deposits (including
negotiable certificates of deposits and repurchase
agreements).
• INCREASING the SRR ratio will:
√ reduce the level of reserves available to the banking institutions.
√ decrease the lending ability of the banking institutions
• DECREASING the SRR ratio will:
√ increase the level of reserves available to the banking institutions.
/PB303/JU
N√ increase the lending ability of the banking institutions. 1
7
Reserve Requirements
-regulations on the minimum
amount of reserves that banks
must hold against deposits
• an increase in reserve requirements means
that
• - banks must hold more reserves and
• - can loan out less of each RM that is
deposited
• as a result, it raises the reserve ratio,
lowers the money multiplier, and decrease
the money supply
••asaa decrease
result, it raises in reserve
the money requirements
multiplier and means
money
increases the supply
that
– lowers the reserve ratio
/PB303/JU banks hold less 1
Nreserves
8
• Source:
/PB303/JU
N 1
http://www.bnm.gov.my
9
• Under s 38(1) of the BAFIA 1989, the
banking institutions are required to observe
a minimum liquidity ratio that expressed as
a percentage of the EL based on the
banking liquid asset
• Liquid assest are:
 Cash
 Money at call
 Treasury bills
 Government securities
 Government investment certificates
 Cagamas Bond
 Bank Negara Bills
 Bank Negara Certificates

/PB303/JU
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State Government Securities
2
0
• INCREASING the MLR ratio will:
√ reduce the level of reserves available to the
banking institutions.
√ decrease the lending ability of the banking
institutions
• DECREASING the MLR ratio will:
√ increase the level of reserves available to the
banking institutions.
√ increase the lending ability of thebanking
institutions.
/PB303/JU
N 2
1
• WHY the minimum liquidity
requirement is essential ????
Because commercial banks need to provide
enough vault cash and other liquid assets
to fulfill the demand for deposits
withdrawal and loans.
Since February 16, 1987 the minimum
liquidity ratio has been fixed at 17 per cent
of the total eligible liabilities.
/PB303/JU
N 2
2
Money market operations (MMO) are
operations conducted by BNM to influence the
liquidity situation in the system. MMO can
be conducted by the following:
(i) Open Market Operations are
mainly transacted via the sales and
purchase of Government papers or
(ii)the borrowing or lending by Bank
Negara Malaysia in the interbank
market.
/PB303/JU
N 2
3
Open-Market Operation (OMO)
Definition of Open Market Operations:
The purchase and sale of government securities in

financial market so as to influence the size of bank
deposits. Government has authorized the BNM to buy
and sell government securities.
/PB303/JU
N 2
4
•When BNM sells securities in the open
market, it receives payment in cash (paid in
the form of commercial bank cheques).
• The cash balances of the banks will decrease
• Reduce their lending activities.
• This results in the reduction of credit available.
When BNM buys securities, it pays cash to the

banks and this will increase the bank’s cash
balances and enable them to increase credit for
their customers.
/PB303/JU
N 2
5
The discount operations is defined as deliberate
measures by BNM to influence the interest rate and
liquidity situations via various terms and conditions
under which the commercial banks and money market
may have temporary access to
BNM’s credit facilities.
The INCREMENT of the discount rate by BNM will:
√ decrease the reserves of banks
√ reduced the credit available to thecustomers
√ decrease the supply of money in the market
The DECREMENT of the discount rate by BNM will:
√ increase the reserves of banks
√ increase the credit available to thecustomers
√ increase the supply of money in themarket
/PB303/JU
N 2
6
Banks may borrow from BNM
The interest rate on the loans that BNM makes to
banks is called the discount rate
A bank borrows from BNM when it has too few
reserves to meet reserve requirements
This might occur because the bank made too many
loans
or
it has experienced recent withdrawals
Therefore, the banking system has more reserves
and this allow to create more money
BNM can alter the money supply by changing the
discount rate
/PB303/JU
N 2
7
• BNM can control including the bank’s liquidity and costof
bank credit through the interest rates charged on
bank loans as well as the rates of interest offered for
deposits.
• INCREASING of the interest rate will:
√ increase the level of cost of funds for bank loans
√ decrease the demand for bankloans
• DECREASING of the interest rate will:
√ decrease the level of cost of funds for bank loans
√ increase the demand for bankloans
/PB303/JU
N
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/PB303/JU
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27
9-29
BNM impose control on credit and strengthen the
credit guidelines to the selected sector, Example
such as:
– priority sector lending guidelines
(ex. Telecommunication and
Tourism)
– hire-purchase guidelines on motor vehicle
– guidelines on credit card operations
– credit limit for purchase of stocks and shares and
units of units trust funds
– credit limit for financing of specific types of
property
/PB303/JU
N
Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-30 28
Refer to a traditional BNM which informally induces
a voluntary response from the financial system to its
policy initiatives such as:
 discouraging financial institutions to lend excessively
for
speculation activity
 encouraging them to extend longer-term financing

loans, to be granted on the basis of viability of
projects rather than purely dependent on meeting
collateral requirements.
 commercial banks were encouraged to step up
their lending to priority areas such as the
bumiputera community and small borrowers
 the banking institutions were also urged to limit
/PB303/JU
N secured by shares to protect the banking
lending
29
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BNM versus
GLOB
CONTINUE’
AL

Relationship BNM with
International Institutions
• BNM has maintained an active

role in international, financial and
economic matters.
• BNM maintains close working
relationship with International Monetary
Fund (IMF), the World Bank, Asian
Development Bank (ADB), Islamic
Development Bank (IDB) and World
Trade Organization.
Relationship BNM with
International Institutions
• BNM is an active organization in

involving any event includes:
– Convention
– Meeting
– SEACEN
– APEC
– ASA (Swap ASEAN)

CONTINUE
/PB303/JU
N
33
9-35
STRUCTURE OF
BNM CHAPTE
R2

GROUP WORK
• Economics Department – Group 1

• Investment and Treasury Department –
Group 2
• Bank Examination Department – Group 3
• Control of Banking Department – Group 4
• Banking Supervision Department – Group 5
• Payment System Department – Group 6
/PB303/JU
N
35
9-37
ORGANISATION STUCTURE
• The Governor is the Chief Executive

Officer of the Bank and is assisted by
three Deputy Governors and seven
Assistant Governors.
Most of the 35 departments/units in the

Bank are organized into seven divisions,
with each Assistant Governor being
responsible for one.
• Organizational Chart
DEPARTMENTS
• Roles of the functional areas include the

following:
– Economics Sector
– Investment and Operations
– Regulation Sector
– Supervision Sector
– Organizational Development
– Payment Systems
– Communications
Link

ECONOMIC SECTOR
• Primarily provides good technical and research support on growth-related
issues to enhance formulation of monetary and credit policies in
promoting monetary stability and ensuring the availability of adequate
credit to finance economic growth.
• Strategies and formulate economic and monetary policies

– conducting surveillance, identifying emerging risk, forecasting trends and
undertake policy research to provide the bank with pre-emptive actions
that would promote sound and sustainable economic growth, monetary
and financial stability and better understanding of the financial sector in
terms of impact with the real economy.
• Formulate and manage the Bank's international relations

– by recommending policies, conducting negotiations, intelligence
gathering and operations on trade financing agreement to promote and
protect Malaysia's interest in economic and financial matters.
• Analyze and forecast on key

– economic indicators, economic outlook and balance of payment movement
Copyright ©2015for theEducation,
Pearson worldInc.and domestic
All rights reserved. economy to formulate economic policy 9-40
ORGANIZATIONAL
DEVELOPMENT
• Spearhead the Bank's strategic management, organizational
performance
management and program management functions
– to drive the Bank's performance improvement processes and transition towards a
Strategy Focused Organisation, thereby strengthening the capacity building of the
Bank.
• Strategically lead and drive resources, human resource (HR)

initiatives and other strategic activities
– to ensure the overall Human Capital Management framework is implemented in

an integrated manner. Also design and develop innovative and cutting edge HR
solutions in order to address bank-wide issues relating to human resources.
• Spearhead and promote state-of-the-art learning practices

to enable performance excellence culture and strengthen
the Bank's capability development.
– This is carried out through effective and efficient management of enterprise-wide
learning and implementation by setting the Bank's learning direction, policies and
INVESTMENT AND OPERATIONS
• Manage domestic liquidity and exchange

rates to ensure that monetary policy targets
are achieved as well as managing external
reserves to safeguard its value and optimize
its returns.
• It also has the responsibility of providing

advice and assistance to the
Government in the area of debt and fund
management and contributing to domestic
financial market development.
REGULATION SECTOR
• Promote financial sector stability through the progressive
development of sustainable, robust and sound financial
institutions policy and infrastructure, thereby enabling a
competitive local financial industry that is resilient against the
changing future environment as well as leading initiatives to
enhance access to financing, including SMEs (Small and
Medium Enterprises).
• Formulate and implement strategies towards building and

positioning Malaysia as a premier integrated Islamic
Financial Centre and the development of relevant policies to
ensure the soundness of the Islamic finance industry.
• Enhance financial capability of consumers via formulation,

implementation and enforcement of market conduct and
consumer protection policies to safeguard the interest of
depositors, consumers and policyholders.
SUPERVISION SECTOR
• Develop, enhance and

implement an effective
surveillance framework
– to ensure safety and soundness of
financial institutions and to enforce
sound practices in them.
• Develop policies and strategies

– to promote a reliable, secure, efficient
clearing, settlement and payment systems
and instruments in the country.
PAYMENT SYSTEMS
• Develop policies and strategies

– to promote reliable, secure and efficient
clearing, settlement and payment systems in
the country.

COMMUNICATIONS
• The communications function has

assumed increasing importance in
response to the heightened demands
of the various stakeholders, seeking
greater transparency and
disclosure.

Exercise/ Discussion
Explain how the following instrument used by

BNM to control fund and supply of credit
in the
economy:
1. Statutory Reserve Requirement (SRR)

2. Minimum Liquidity Requirement (MLR)
3. Money Market Operation
4. Discount Operation
5. Interest Rate Management
6. Credit Control & Guidelines
/PB303/JU
7. N
Moral Suasion 4
7
THE END
CENTRAL BANKS
/PB303/JU
N 4
8

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Part 4

• At the end of the unit you will be able to :

• At the end of the unit you will be able to :

• Bank Negara Malaysia (BNM) of Malaya

• The establishment of BNM in 1959 can be

• Bank Negara Malaysia is entrusted with the

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-5

• Being a Central Bank in an emerging

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-6

• Bank Negara Malaysia is managed by a

• Completing the management team are 3

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-7

• Since May 2000

• Section 9 (1) of the Central Bank of

 Consists of ten members.

to issue currency and keep reserves while

to act as a banker and financial adviser or

to promote monetary stability and a sound

to influence the credit situation to the

Bank for Currency Issue

(ii) Source of Funds to Government

(iii)Management of National Debt

To Promote Monetary Stability and

•Influence the level of inflation

Banker to the Banks

• SRRis known as a bank’s eligible liabilities (EL). The EL

Definition of Open Market Operations:

The purchase and sale of government securities in

When BNM buys securities, it pays cash to the

 encouraging them to extend longer-term financing

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-32

• BNM has maintained an active

• BNM is an active organization in

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-34

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-36

• Economics Department – Group 1

• The Governor is the Chief Executive

Most of the 35 departments/units in the

• Roles of the functional areas include the

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-39

• Strategies and formulate economic and monetary policies

• Formulate and manage the Bank's international relations

• Analyze and forecast on key

• Strategically lead and drive resources, human resource (HR)

– to ensure the overall Human Capital Management framework is implemented in

• Spearhead and promote state-of-the-art learning practices

• Manage domestic liquidity and exchange

• It also has the responsibility of providing

• Formulate and implement strategies towards building and

• Enhance financial capability of consumers via formulation,

• Develop, enhance and

• Develop policies and strategies

• Develop policies and strategies

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-45

• The communications function has

Copyright ©2015 Pearson Education, Inc. All rights reserved. 9-46

Explain how the following instrument used by

1. Statutory Reserve Requirement (SRR)

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