FINANCIAL SYSTEM IN

MALAYSIA (Topic 9&10)

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Outline:
• The structure of Malaysian
Financial System
•Financial Institution (bank and non-bank)
•Non-banks fin intermediaries
•Malaysian financial market
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THE STRUCTURE OF MALAYSIAN FINANCIAL SYSTEM

MALAYSIAN FINANCIAL SYSTEM

FINANCIAL INSTITUITION FINANCIAL MARKETS

-BANKING SYSTEM
-NON-BANK FINANCIAL INTERMEDIARIES (Topic 1)
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MALAYSIAN BANKING SYSTEM

FINANCIAL
INSTITUTIONS

BANKING
BANK NEGARA INSTITUTION
MALAYSIA -commercial banks NON-BANK
(topic 3) -investment banks FINANCIAL
-Islamic Banks INTERMEDIARI
ES
 COMMERCIAL BANKS

• The largest and main players in the banking system.

• Main characteristic: provision of current account facilities

where payment can be made through issuing cheques.

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 FUNCTIONS OF COMMERCIAL BANK 5

Provision of
Provision of various
Mobilisation of facilities for Granting loans Financing of facilities &
savings payment & and advances government services
deposit authorized by
BNM
 SOURCES OF FUNDS FOR COMMERCIAL BANKS

a) Major sources come from deposits.

• Savings, Current & Time Deposits
• Negotiable Certificate of Deposits (NCDs)

b) Amount borrowed from other financial

institution/inter-bank borrowing.
B
a • borrowings from other banks through federal
n funds purchases and repo agreements, bank
kAmount borrowed Deposits
from notes, long-term debt, and commercial paper
Debetures andother
e institution/inter-bank notesfinancial
Capital & reserves
borrowing.
r
s
c) Capital & reserves.
a • Capital refers to the money put up by shareholders
c • Reserves refers to undistributed profits & other
c
e
capital reserves
p
t
a d) Debetures and notes.
n
c e) Bankers acceptances & etc.
e 6
s
 USES OF FUNDS FOR COMMERCIAL BANKS

a) Loan activities.
• Utilized more than half of bank resources
• Eg: hire-purchase, leasing, personal loans,
housing loans, overdraft etc.
b) Amount due to financial institutions.
• Cash items in process of collection
Amount
Cash due to financial
& reserves
• Deposits at other larger banks
Loans with
Investments & etcBNM
institutions c) Cash & reserves with BNM.
d) Investments & etc.
• Include investment in T-bills, Government
securities, stock & private debt securities
markets

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INVESTMENT BANKS

• A financial intermediary that performs a variety of services. This includes

underwriting, acting as an intermediary between an issuer of securities and the
investing public, facilitating mergers and other corporate reorganizations, and
also acting as a broker for institutional clients.

• The role of the investment bank begins with pre-underwriting counseling and
continues after the distribution of securities in the form of advice.
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ISLAMIC BANKS

Islamic Banking
• Eg: BIMB, Bank Muamalat
• Introduce in 1983 with the enforcement of the Islamic Banking Act 1983 which empowers
BNM to supervise and regulate Islamic Banks
• Conduct business strictly in line with Syariah Principles
• Serves both muslim and non-muslims customers
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ISLAMIC BANKS Vs. Conventional bank

BASIS CONVENTIONAL Islamic Bank

Operation Man made rule and regulation-Riba Shariah compliant
Revenue interest paid & received project profit (profit
sharing) that
implemented by customer
Turnover interest rate =predetermined, if Bank also bear the loss
referring to floating rate also the because of concept profit
changes of rate also predetermined. sharing & pay zakat
Only customer bear the loss & Pay
Tax

Relationship Creditor and debtor Partnership

bank&
customer
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BANK PERFORMANCE

Assessing Bank Performance:-

1. Interest Income and Expenses
2. Non interest Income and Expenses
3. Evaluation ROA
4. Evaluation ROE
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BANK PERFORMANCE

1. Interest Income and Expenses

 Gross interest income is interest income generated from all
assets. Gross interest income tends to increase when interest
rates rise and to decrease when interest rates decline. (Exhibit
20.3)
 Gross interest expenses represent interest paid on deposits
and on other borrowed funds. Gross interest expenses will
normally be higher when market interest rates are higher.
 Net interest income is the difference between gross interest
income and interest expenses and is measured as a
percentage of assets (See Exhibit 20.4).
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BANK PERFORMANCE

2. Non interest Income and Expenses

 Noninterest income results from fees charged on
services provided, such as lockbox services, banker’s
acceptances, cashier’s checks, and foreign exchange
transactions.(Row 4 of Exhibit 20.3)
 The loan loss provision is a reserve account
established by the bank in anticipation of loan losses
in the future. (Row 5 of Exhibit 20.3)
 Noninterest expenses include salaries, office
equipment, and other expenses not related to the
payment of interest on deposits. (Row 6 of Exhibit
20.3)
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BANK PERFORMANCE

Return on Assets - The ROA is influenced by all income statement

items and the policies that affect those items.

Reasons for a Low ROA

• Incurring excessive interest expenses

 Low interest received on loans and securities
 Insufficient non-interest income
 Heavy loan losses
 Excessive non-interest expenses
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BANK PERFORMANCE

Return on Assets - The ROA is influenced by all income statement

items and the policies that affect those items.

Reasons for a Low ROA

• Incurring excessive interest expenses

 Low interest received on loans and securities
 Insufficient non-interest income
 Heavy loan losses
 Excessive non-interest expenses
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BANK PERFORMANCE

4. Return on Equity
 ROE (Return on Equity) is affected by the same income statement
items that affect ROA and by the bank’s degree of financial
leverage.
 The higher is better
 The leverage measure is the inverse of the capital ratio (when only
equity counts as capital).

NON-BANK FINANCIAL INTERMEDIARIES
Refers to the institutions that
are supervised by various
government departments
and agencies EXCEPT
insurance companies are
supervised by BNM.
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Provident & Pension Funds
Insurance Companies
Development and Finance Institutions (DFIs)
Saving Institutions
Unit Trust
Housing Credit Institutions
Mutual Funds
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Provident & Pension Fund

• Institutions that provide visionary and pension scheme for

government and non-government employees.

• Eg: EPF (KWSP), SOCSO

BACK
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Insurance Company

• Institutions that provide various

types of insurance to the
public.

• Eg: Takaful, AIA, Allianz, Kurnia

Insurance
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Development and Finance Institutions (DFIs)

• Specialized financial institutions,

established by Government to
promote investments in the
specific sector such as
manufacturing, SMEs &
agriculture sectors

• Eg: MIDF, Bank Pembangunan,

Bank Industri, Agro Bank
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Saving Institutions

• Exist to complement commercial banks & finance companies

as the major deposit-taking institutions
• Eg: Bank Simpanan Nasional (BSN), Bank Rakyat
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Unit Trust

• Organizations that pool funds together from investors so that

a bigger investment in securities market can be made

• Eg. MARA Unit Trust, National Unit Trust (ASN)

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Housing Credit Institution

• This institutions help to ensure low-income group able to buy

houses

• Eg: Malaysia Building Society Berhad (MBSB), Borneo Housing

Mortgage Finance Berhad (BHMF)
 Mutual Funds 24

 Mutual funds provide an important service for individual

investors who wish to invest funds.
 Mutual funds are sometimes referred to as open-end funds
because they are open to investors, meaning that they will sell
shares to investors at any time. In addition, they allow investors
to sell (redeem) the shares back to the fund at any time.

BACK
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Mutual Funds Categories

 Mutual funds are classified as

 Stock (or equity) mutual funds
 Bond mutual funds
 Money market funds

 Stock funds are dominant when measured by the

market value of total assets among mutual funds.
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Mutual Funds Categories

Stock Mutual Fund Categories

 Growth Funds
 Typically composed of stocks of companies that have not fully matured and are
expected to grow at a higher than average rate in the future.
 The primary objective is to achieve an increase in the value with less concern
about the generation of steady income.
 Capital Appreciation Funds
 Also known as aggressive growth funds - Composed of stocks that have
potential for very high growth but may also be unproven.
 These funds are suited to investors who are willing to risk a possible loss in value.
 Growth and Income Funds
 Contains a unique combination of growth stocks, high-dividend stocks, and fixed-income
bonds.
 For investors looking for potential for capital appreciation along with some stability in
income.
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Mutual Funds Categories

Stock Mutual Fund Categories(cont’)

 International and Global Funds
 Created to enable investors to invest in foreign securities without incurring excessive
costs.
 Specialty Funds
 Focus on a group of companies sharing a particular characteristic.
 Index Funds
 Composed of stocks that, in aggregate, are expected to move in line with a specific
index.
 These funds may be attractive to investors who wish to invest in a particular foreign
market but do not have much knowledge about the specific stocks in that market.
 Multifund Funds
 Invest in a portfolio of different mutual funds.
 Investors incur two types of management expenses: (1) the expenses of managing each
individual mutual fund and (2) the expenses of managing the multifund mutual fund.
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Mutual Funds Categories

BOND Mutual Fund Categories(cont’)

 Income Funds
 Composed of bonds that offer periodic coupon payments and vary in exposure to risk.
 Best suited for investors who rely on the fund for periodic income and plan to maintain the fund over
a long period of time.
 Tax-Free Funds
 Mutual funds containing municipal bonds
 Allow investors in high tax brackets with even small amounts of money to avoid taxes while
maintaining a low degree of credit risk.

 High-Yield (Junk) Bond Funds

 Typically, the bonds are issued by highly leveraged firms.
 Investors desiring high returns and willing to incur high risk may consider bond portfolios with at
least two-thirds of the bonds rated below Baa by Moody’s or BBB by Standard & Poor’s.
 International and Global Bond Funds
 Contain bonds issued by corporations or governments based in other countries.
 Maturity Classifications
 Commonly segmented according to the maturities of the bonds they contain
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Mutual Funds- PERFORMANCE

Valuation of Stock Mutual Funds

 Change in Market Conditions
 A change in a stock mutual fund’s valuation is related to a change
in stock market conditions.
 Beta measures the sensitivity of a mutual fund’s exposure to a
change in stock market conditions.
 Change in Sector Conditions
The valuation of a stock mutual fund focused on a specific sector
is influenced by conditions in that sector.
 Change in Management Abilities
Mutual funds in the same sector can experience differences in
valuation because of differences in management abilities.
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MALAYSIAN FINANCIAL MARKET

FINANCIAL MARKETS

MONEY CAPITAL DERIVATIVES OFFSHORE

MARKET MARKET MARKET MARKET
(topic 1) (topic 1) (topic 7)
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MALAYSIAN FINANCIAL MARKET

• Money Market
• Short-term instruments i.e. T-Bills
• Capital Market
• Long-term instruments i.e. Stocks, Bonds

• Derivatives Market (topic 7)

• Future/option instruments derive from underlying securities
i.e. KLIBOR future, KLCI future

• Offshore Market
• providing corporate and commercial services to non-resident 
offshore companies, and for the investment of offshore funds
• Minimize tax burden i.e. Labuan
International Offshore Financial Centre (IOFC)
 ADVANTAGES OF OFFSHORE MARKET 32

Diversification of Investments
• In some countries, regulations restrict the international investment opportunities of
citizens. Many investors feel that such restriction hinders the establishment of a truly
diversified investment portfolio. Offshore accounts are much more flexible, giving
investors unlimited access to international markets and to all major exchanges.
Tax Advantages
• This is the strongest driving force for most investors. But should not be the main driving
factor to hold assets offshore. The tax savings deriving from offshore investments are not
illegal, they are part of a well planed international investment structure. They are a
product of geo arbitrage, played with taxation laws among different jurisdictions
Privacy
• Most offshore jurisdictions offer foreign investors a degree of secrecy.
Secrecy is not just for the provision of hiding transactions it is a right that
should be enjoyed by everyone in their investment decisions. This secrecy
doesn’t necessarily mean that foreign investors are seeking illegal
movements on an international scale and does not automatically imply that
offshore jurisdictions encourage illegal activities, it is simply restoring a right
that investors have lost in most first world nations. The confidentiality laws
maybe breached in clear instances of criminal acts by the investor..
 DISADVANTAGES OF OFFSHORE MARKET 33

Cost
Offshore investments don’t come cheap. Depending on the jurisdiction of choice, the minimum requirement to open an
investment account ranges from $100,000 to $1 million. Furthermore, offshore investments may cost you more due to the
professional fee structure of the account service provider. Hiring professional financial advisors will save you a lot of time
setting up and managing your offshore accounts.As mentioned, every jurisdiction has a different set of requirements. It is
best to study each option according to your specific needs and level of available resources
Risk
• Like any other business or investment venture, offshore investing maybe risky. You need to take your risk
profile and risk parameters into consideration for any offshore investment just as you would at home.The
pros and cons presented in this article is for general use. In real life, the considerations will differ from
one investor to the other, thus there will be different sets of options presented to each. Times are
changing and it is only natural to learn the latest trends and best practices to improve your lives and those
Legalities
• Matters around legality might make you nervous about investing offshore and could cause you to be
discouraged about investing. The positions of many first world nations to offshore investing has many
ordinary citizens focused on it must be illegal or it is morally wrong, where in fact it is perfectly legal and in
some cases it is used by the same people that say otherwise. This propaganda campaign from first world
nations is nothing more then a way they can appease the voting masses that they are trying to look after
the interests of them.
Safety Considerations
• For some investors, especially those new to the offshore world, the question whether this concept is safe
or not is of concern. In truth, as with investing in your home country you should always undertake proper
due diligence on any potential account manager or organization. It is importance that you choose a
reputable organization to handle your assets.The more popular offshore countries have long proven
records of secure investment opportunities. In fact, wealthy individuals and multinational corporations
have long been practicing offshore investing.