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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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EVOLUTION OF THE FINANCIAL
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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EVOLUTION OF THE FINANCIAL
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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DEVELOPMENT OF FINANCIAL
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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DEVELOPMENT OF FINANCIAL
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
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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
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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
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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
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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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REGULATION OF FINANCIAL SYSTEM
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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Ensuring Soundness of Financial Intermediaries
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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Ensuring Soundness of Financial Intermediaries
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
REGULATION OF FINANCIAL SYSTEM
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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
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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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