Topik 1 Financial System in Malaysia (1)

7/28/2019 Topik 1 Financial System in Malaysia (1)

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SYSTEM INMALAYSIATOPICS TO STUDY:

1. EVOLUTION OF THE FINANCIAL SYSTEM

2. DEVELOPMENT OF FINANCIAL SYSTEM IN

MALAYSIA

3. ROLES OF THE FINANCIAL SYSTEM4. STRUCTURE OF THE FINANCIAL SYSTEM

5. ASSETS, SOURCES & USES OF FUND OF

FINANCIAL SYSTEM


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EVOLUTION OF THE FINANCIAL

SYSTEM

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SAVING AND BORROWING PRACTICES

When the practice of borrowing began. Fundsaccumulated by wealthy persons were loaned to

other individuals or companies who were willingto pay for these funds for a fee or interest.

This is where those economic units who are inneed of funds deficit units came to terms with

those who have excess funds to be lent out orcalled surplus units.

At this stage, however, there are some problemssuch as the difference in amount, maturity and

the element of risks.


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SYSTEM

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ESTABLISHMENT OF FINANCIAL INTERMEDIARIES

The establishment of financial intermediaries toovercome 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 byissuing relatively risk-free liabilities.

At the same time, through their specialized knowledge of

the credit market, they were able to supply funds todeficit units in the amount and terms that these unitswere willing to pay to meet its financing needs.

The liabilities of these financial intermediaries are knownas secondary or indirect debt.


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SYSTEM

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VARIED FINANCIAL INSTRUMENTS

In of Malaysia, the country can be considered to have

arrived at the final stage of the evolution process inestablishing a complete monetary system

When a complete set of financial intermediaries were

established

A financial system which provide a variety offinancial instruments as saving media for the surplus

units

As well as a varied range of credit and investment

facilities to meet the financing requirements of the


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DEVELOPMENT OF FINANCIAL

SYSTEM IN MALAYSIA

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F irst 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, BNMs 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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SYSTEM IN MALAYSIA

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Third phase1980s, BNMs 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 globalrecession 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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SYSTEM IN MALAYSIA *

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F if th phase ??


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ROLES OF FINANCIAL INSTITUTIONS

AND FINANCIAL INTERMEDIARIES IN

THE DEVELOPMENT OF COUNTRY

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Intermediation function

Operation of the payment system

As a channel for transmission of monetary policy


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HOUSEHOLD

ENTERPRISE

GOVERNMENT

INTERNATIONAL

SOURCES OF FUNDS

Currency

Deposits

Bills

Loans

Bonds

Unit trustsShare capital

Insurance

premiums

Provident funds

Pension funds

Foreign loans

Investments

FINANCIAL

INSTRUMENTS

Money at call

Overdrafts

Bills

Term loans

Hire purchase

Bridging loansLeasing

Securities

Bonds

Debentures

External reserves

FINANCIAL

INSTRUMENTS

Central bank

Commercial

banks

Finance

companies

Merchant banksDiscount houses

Industrial Fin.

Inst.

Saving inst.

Provident funds

Pension funds

Insurance

companiesUnit trusts

Building societies

Cooperatives

Other fin. inst.

FINANCIAL

INTERMEDIARI

ES

HOUSEHOLD

ENTERPRISE

GOVERNMENT

INTERNATIONAL

THE FLOW OF FUNDS IN AN ECONOMY

10

-SAVINGS /INVESTMEN

T-

SURPLUS

UNIT

USES OF FUNDS

-INVESTMENT/

EXPENDITUR

E-

DEFICIT UNIT


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FUNDS FLOW THROUGH THE

FINANCIAL SYSTEM

by Snurazani

Mustaffa/20111

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THE FINANCIAL SYSTEM STRUCTURE IN MALAYSIA

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3ani Mustaffa/2011


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IMPORTANCE OF FINANCIAL MARKETS Financial markets improve individual participants by providing

investment returns to lender-savers and profit and/or useopportunities to borrower-spenders

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

Financial markets are critical for producing an efficient allocationof capital, which contributes to higher production and efficiencyfor the overall economy

Improve well being of consumers by allowing better timing ofpurchases.

Overall: Well-functioning financial markets improve the economicwelfare of every segment in the society

by Snurazani

Mustaffa/2011


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5. STRUCTURE OF FINANCIAL MARKETSHow to categorize financial markets?In terms of:

How to obtain funds: Debt and equity markets Type of markets: Primary and secondary marketsTypes of secondary market trading: Exchange and Over-the-counter markets Types of maturities: Money and capital markets

by Snurazani Mustaffa/2011


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STRUCTURE OF FINANCIAL MARKETS

How funds are obtain in the financial markets? Debt and equity markets

1. Issue debt instrumentA contractual agreement by the borrower to paythe holder of the instrument fixed dollar amounts at regular intervals untila specified date, when the final payment is made.

Buyers of debt instruments are suppliers (of capital) to the firm, notowners of the firm

Debt instruments have a finite life or maturity date. Maturity:Number of years until the instruments 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 paywith legal rights to enforce repayment

Disadvantage is that return/profit is fixed or limited

by Snurazani

Mustaffa/2011


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STRUCTURE OF FINANCIAL MARKETSHow funds are obtain in the financial markets? Debt and equitymarkets

2. Issue equity - Claims to share in the net income and assets of abusiness

Periodic payments in the form of dividends to holders and haveno 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 beforeequity payments can be made



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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 tobuyers

Investment bank assists in the sale of securities in the primarymarket. Involves underwriting: guarantees a price for acorporations 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 ofsecurities. Dealers: link buyers and sellers by buying and sellingsecurities at stated prices.

2 important functions: Make it easier to sell the financialinstruments (liquidity) & Determine the price of the securitythat the issuing firm sells in the primary marketby Snurazani Mustaffa/2011


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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 comesto them and is willing to accept their prices.

Very competitive

Basis of maturity:

1. Money market: financial market in which only short-term debtinstruments are traded

2. Capital market: financial market in which long-term debt and equityinstruments are traded



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ASSETS OF THE FINANCIAL

SYSTEM

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Banking systemNon Banking system/

Non Bank Financial

IntermidiariesBank Negara

Banking Institution

(Commercial Bank, Finance

Companies, Merchant Banks)

Discount House

Provident and Pensions Funds

Insurance Funds

Development Finance

InstitutionsSaving Insiutions

Other Non-Bank Financial

Intermidiaries


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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 financial markets means that

investors may be subject to adverse selection and moralhazard problems that may hinder the efficient operation offinancial markets and may also keep investors away fromfinancial markets

The Securities and Exchange Commission (SEC) requirescorporations issuing securities to disclose certain informationabout their sales, assets, and earnings to the public andrestricts trading by the largest stockholders (known asinsiders) in the corporation

Such government regulation can reduce adverse selectionand moral hazard problems in financial markets andincrease their efficiency by increasing the amount ofinformation available to investors



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2. To Ensure the Soundness of Financial IntermediariesBecause providers of funds to financial intermediaries may not be ableto 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 unsoundinstitutions, with the possible outcome of a financial panic thatproduces large losses for the public and causes serious damage to the

economyTo protect the public and the economy from financial panics, thegovernment 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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Disclosure Requirements: There are stringent reportingrequirements 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 providingfunds to a financial intermediary from any financial loss if the

financial intermediary should fail

Ensuring Soundness of Financial Intermediaries



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Restrictions on Assets and Activities: There are restrictions onwhat financial intermediaries are allowed to do and whatassets they can hold

Before you put your funds into a bank or some other suchinstitution, you would want to know that your funds are

safe and that the bank or other financial intermediary willbe able to meet its obligations to you

One way of doing this is to restrict the financialintermediary from engaging in certain risky activities

Another way is to restrict financial intermediaries from

holding certain risky assets, or at least from holding agreater quantity of these risky assets than is prudent



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Limits on Competition: Although the evidence that unbridledcompetition among financial intermediaries promotes failures thatwill harm the public is extremely weak, it has not stopped the stateand federal governments from imposing many restrictive regulations

In the past, banks were not allowed to open up branches in otherstates, and in some states banks were restricted from openingadditional locations

Restrictions on Interest Rates: Competition has also been inhibitedby regulations that impose restrictions on interest rates that can bepaid on deposits

These regulations were instituted because of the widespread beliefthat unrestricted interest-rate competition helped encourage bankfailures during the Great Depression

Later evidence does not seem to support this view, and restrictionson interest rates have been abolished



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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 theeconomy), much regulation of these financial intermediaries isintended to improve control over the money supply

One such regulation is reserve requirements, which make itobligatory for all depository institutions to keep a certainfraction of their deposits in accounts with the Federal ReserveSystem (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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Takaful Act 1984

Provides regulation for takaful business in Malaysia

Insurance Act 1996

Provides licensing and regulations for insurance business andfinancial 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

Regulations of payment systems.by Snurazani Mustaffa/20113

1


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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 ofbusiness.

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4 Consolidation and restructuring of the financial


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4. Consolidation and restructuring of the financial

system

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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 thecrisis weakened the health of the banking sector, asreflected in the deterioration in capitalization and assetquality.

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 CorporateDebt Restructuring Committee to deal with the emergingproblems of weakening asset quality and capitalization,as well as corporate debts, respectively.


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6.Prudential and regulatory reforms

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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 orcontroller 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 1st May

1988


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7.Liberalization of the financial sector

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Malaysia recognizes that the opening up of the

domestic financial sector to foreign competitionwould 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 thesechanges without undermining financial stability.

This policy has resulted in a high foreign

participation in the Malaysian financial sector.


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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 inMalaysia? 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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Topik 1 Financial System in Malaysia (1)

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