CHAPTER 1

THE
STRUCTURE OF
MALAYSIAN
FINANCIAL
SYSTEM

FIN426
Learning Objectives:

At the end of the lesson, students should be able to:

– distinguish the components of the Malaysian Financal
System.
– describe the Malaysian Banking System, Non Bank
Financial Intermediaries and Financial markets.
– illustrate and comprehend the knowledge of the past and
current development evolving the Malaysian Financial
System.
– to explain Agent Banking Services
THE STRUCTURE OF
MALAYSIAN FINANCIAL
SYSTEM

– The Malaysian Financial System can be divided into

three; the banking system, non-bank financial
intermediaries and financial markets.
These can be elaborated further by
using a chart:

The Malaysian
Financial system

Financial Financial
Institutions Markets

Banking System Non-bank Financial

Intermediaries
Cont’

Malaysian financial system can be categorize into 3 broad sectors:

1. Banking Financial Intermediaries

The monetary institutions

Comprising BNM and the commercial banks (now including bank companies).

The banking system is the largest components of the financial system, accounting for about 67% of the
total assets of the financial system.

2. Non-Banking Financial Intermediaries

Carry out financing activities but their resources are not directly obtained from the savers as debt.
Instead, these institutions mobilize the public savings for rendering other financial services. All such
institutions are financial intermediaries and when they lend, they are known as (NBI’s)

Eg. Factoring companies, Insurance Companies, Cagamas Berhad

3. Financial Market

A market for the exchange of capital credit, including the money markets and the capital market.

Eg. Labuan International Offshore Financial Centre, Stock Exchange, Commodity Future
Exchange.
THE MALAYSIAN BANKING
SYSTEM

The Malaysian Banking System consists of:

– Central Bank (Bank Negara Malaysia- BNM)

– Banking Institutions- Commercial banks, Bank Islam Malaysia

Berhad and Investment Banks.

– Other financial institutions- the representatives offices of

foreign banks and the offshore banks in the International
Offshore Financial Centre in Labuan (Labuan IOFC), Discount
houses.
 Cont’

– The Banking System in Malaysia is under the control and supervision of the
Bank Negara Malaysia. It is can be shown in the chart below:

THE MALAYSIAN BANKING SYSTEM

The Malaysian Banking System

BANK NEGARA MALAYSIA

Commercial Banks Islamic Bank Investment Banks

 Examples:
– http://www.bnm.gov.my/index.php?ch=li&cat=banking&type=CB&fund=0&cu=0
– Commercial Banks No.  1 Affin Bank Berhad 2 Alliance Bank Malaysia Berhad 3
AmBank (M) Berhad 4 Bangkok Bank Berhad 5 Bank of America Malaysia Berhad 6
Bank of China (Malaysia) Berhad 7 Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad 8
BNP Paribas Malaysia Berhad 9 CIMB Bank Berhad 10 Citibank Berhad 11
Deutsche Bank (Malaysia) Berhad 12 Hong Leong Bank Berhad 13
HSBC Bank Malaysia Berhad 14 India International Bank (Malaysia) Berhad 15
Industrial and Commercial Bank of China (Malaysia) BerhadF 16
J.P. Morgan Chase Bank Berhad 17 Malayan Banking BerhadL 18
Mizuho Corporate Bank (Malaysia) Berhad 19 National Bank of Abu Dhabi Malaysia Berhad 20
OCBC Bank (Malaysia) Berhad 21 Public Bank Berhad 22 RHB Bank BerhadL 23
Standard Chartered Bank Malaysia Berhad 24
Sumitomo Mitsui Banking Corporation Malaysia Berhad 25 The Bank of Nova Scotia Berhad
26 The Royal Bank of Scotland Berhad 27 United Overseas Bank (Malaysia) Bhd

– Investment Banks No. 1 Affin Investment Bank Berhad 2 Alliance Investment Bank Berhad 3
AmInvestment Bank BerhadL 4 CIMB Investment Bank Berhad 5
ECM Libra Investment Bank Berhad 6 Hong Leong Investment Bank Berhad 7
HwangDBS Investment Bank Berhad 8 KAF Investment Bank Berhad 9
Kenanga Investment Bank Berhad 10 Maybank Investment Bank Berhad 11
MIDF Amanah Investment Bank Berhad12 MIMB Investment Bank Berhad 13
OSK Investment Bank Berhad 14 Public Investment Bank Berhad 15
RHB Investment Bank BerhadL
 Examples:

Islamic Banks
•Affin Islamic Bank Berhad(L)
•Al Rajhi Banking & Investment Corporation (Malaysia) Berhad(F)
•Alliance Islamic Bank Berhad(L)
•Alliance Islamic Bank Berhad(L)
•AmIslamic Bank Berhad(L)
•Asian Finance Bank Berhad(F)
•Bank Islam Malaysia Berhad(L)
•Bank Muamalat Malaysia Berhad(L)
•CIMB Islamic Bank Berhad(L)
•Hong Leong Islamic Bank Berhad(L)
•HSBC Amanah Malaysia Berhad(F)
•Kuwait Finance House (Malaysia) Berhad(F)
•Maybank Islamic Berhad(L)
•OCBC Al-Amin Bank Berhad(F)
•Public Islamic Bank Berhad(L)
•RHB Islamic Bank Berhad(L)
•Standard Chartered Saadiq Berhad(F)
There are two systems involve in the
Malaysian Banking System:

Monetary Institution
– Monetary institution’s principal activities involve directly with the money.
– Principal liabilities are generally accepted as money.
– The monetary institutions are the Bank Negara Malaysia i.e. issuing currency .
– Commercial Banks and Islamic banks are allowed to operate current account.

 
Non-Monetary Institution
– Non-monetary institution involves with the main activities of granting the loan,
hire purchase and other activities or generally accepted as near money.
– Examples of non-monetary institutions are investment banks and credit
guarantee corporation.
THE NON-BANK FINANCIAL
INTERMEDIARIES (NBFIs)

– The Non-Bank Financial Intermediaries comprise five groups of Institutions:

 insurance companies (including takaful)

 the development finance institutions
 savings institutions
 Provident and Pension Funds
 other non bank financial intermediaries.
 
– The-Non Bank Financial Intermediaries mentioned above are supervised by
various Government departments and agencies.
 NON BANK FINANCIAL INTERMEDIARIES

Government Departments and Agencies

Other
Financial
Development
Intermediaries
Finance
Institutions
Insurance
Companies
Savings Provident
Institution and Pension
Funds
 FINANCIAL MARKETS

FINANCIAL
MARKETS

Money Foreign Capital Derivatives Offshore

Market Exchange Market Market Market
Market
FINANCIAL MARKETS

Financial Markets in Malaysia are:

1. Money Market
• For channelling of short term funds with maturities typically not exceeding 12 months.
• It provides a ready source of funds for market participants facing temporary shortfalls in
funding.
• Also providing short term investment outlets for those with temporary surplus funds.
• Operations in the money market comprise two broad categories: the placement of
deposits and the purchase and sale of short term securities(bankers acceptance, negotiable
instruments of deposit, treasury bills, cagamas notes,etc)

2. Foreign Exchange market

– For trading of foreign currencies against the ringgit or against other foreign currencies.

– Dealing in the foreign exchange market can be undertaken in the spot market as well as the
forward and swap markets.
FINANCIAL MARKETS

3. Capital Markets: Equity market and Bond market

– Capital markets are markets for raising long term funds and comprise the equity and
bond markets.
– Equity market provides the avenue for corporation to raise funds by issuing stocks
and shares.
– Bond market is the market through which both the private and public sectors can
raise funds, by issuing private debt securities (PDS) and government securities.
4. Derivatives Markets: Forwards, Futures and Options and Swap
– For trading instruments that provide contingent claims on underlying assets and
whose values depend on the price of the underlying assets or securities.
– The main use of derivatives is to hedge against volatility in the price of the
underlying assets.
5. Offshore Market-Labuan International Offshore Financial Centre (Labuan
IOFC)
– Is aimed at enhancing the attractiveness of Malaysia as a regional financial centre, as
well as to promote the economic development of Labuan and its vicinity.
Agent Banking Services

– The introduction of agent banking by the Bank in 2012 will further

contribute to the financial inclusion agenda by enhancing accessibility to
quality and affordable financial services, particularly in the underserved
and remote areas.

– Agent banking is the provision of banking services by a licensed financial

institution to customers through a third-party agent, such as retail outlets
and post offices.

– By substantially lowering the cost of providing banking services, and

making it easier for individuals to access banking facilities in an
environment they are familiar with, agent banking channels can help bridge
commercial and inclusion imperatives, especially for high-volume, low-
value accounts.
Agent Banking Services

• Only legally-established non-bank entities with fixed business premises can

be contractually appointed as agents.
• Agents must be financially sound and have the knowledge and competency
to conduct banking services on behalf of the financial institutions.
• Agents can accept deposits, facilitate withdrawals, perform fund transfers,
and facilitate bill payments and financing repayments.
• The opening of bank accounts, money-changing services and appraisals of
financing applications must continue to be performed only by financial
institutions to ensure compliance with ‘know-your-customer’, customer
suitability and responsible financing requirements.
• Transactions are conducted on a real-time basis at the agent’s business
premise.
Agent Banking Services

•The national agent banking logo must be prominently displayed

together with the financial institution’s logo, at the business premise of
agents to facilitate easy identification of authorized agents by
consumers.
Agent Banking Services

Summary
i) Agent appointment and monitoring process
– Only legally-established non-bank entities with fixed business premises can be
contractually appointed as agents
– Agents must be financially sound and have the knowledge and competency to
conduct banking services on behalf of the banks
– Financial inst must establish a management oversight mechanism to monitor agent
conduct and ensure that associated risks are managed effectively

ii) Provision for basic banking services offered

– Agents can accept deposits, facilitate withdrawals, perform fund transfers, and
facilitate bill payments and financing repayments
– The opening bank-accounts, money changing services and appraisals of financing
applications must be performed only by banks
Agent Banking Services

iii) Safeguards to promote secure transactions

– Transactions are conducted on a real-time basis at the agent’s business premise
– Financial inst must have in place robust infrastructure to support agent banking
facilities

iv) Consumer awareness and protection

– Details of authorized agents must be published and updated on the financial inst’s
website
– Financial inst must implement measures to ensure customers are adequately
informed on their rights and responsibilities.
– The national agent banking logo must be prominently displayed together with the
financial inst’s logo, at the business premise of agents
Thank you

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