1 MCF 304: Bank Management Lecture 1.1 Structure of Financial Systems in Malaysia

2 Structure of Financial Systems in Malaysia Financial System (FS) acts as a mechanism to transfer excess fund from to those who need them The Malaysian FS structure can be divided into three parts; i.Banking system ii.Non-bank financial intermediaries iii.Financial markets

3 Banking System Bank Negara Malaysia Banking Institutions i.Commercial banks ii.Finance companies iii.Merchant banks iv.Islamic banks Discount Houses Representative office of foreign banks Labuan off-shore banks

4 Non-Bank Financial Intermediaries Employee Provident Fund & Pension Fund Insurance & Takaful companies Development Financial Institutions (FI) i.SME Bank ii.Agro Bank Savings Institutions i.Bank Simpanan Nasional ii.Co-operatives associations iii.Unit Trusts iv.Lembaga Urusan Tabung Haji

5 Financial Markets Money Market & Foreign Exchange Market Capital Market i.Equity market ii.Bond market Derivatives Market / Off Shore Market i.Labuan Off Shore ii.Foreign Finance Authority

6 Banking System Financial intermediaries linking financial institutions and individuals with excess fund and financial institutions and individuals with shortage fund The Central Bank (BNM) regulates and control the banking system

7 Banking System Central Bank Commercial Banks & Finance Companies Merchant Banks & Discount Houses Offshore Banks & Representative Office of Foreign Banks Islamic Banks

8 Central Bank (Bank Negara Malaysia) Main Objectives i.Supply currency, acts as custodian of banks reserves & controller of the currency value ii.Government’s banker and financial adviser iii.Ensure financial stability & strong financial structure iv.Commercial bank’s banker v.Control & influence the country’s credit situation to ensure a stable economic growth rate

9 Central Bank Control & influence the country’s credit situation to ensure a stable economic growth rate i.Statutory reserves requirement ii.Minimum liquidity requirement iii.Open market operation iv.Discount operations v.Interest rate control vi.Credit control & lending guidelines vii.Moral persuasion

10 Commercial Banks Accepting deposits for current, deposits, savings and other similar accounts Making payments to collect cheques written or paid by customers Other businesses as permitted by the Cental Bank / MOF

11 Role & Importance of Commercial Banks Creating money Providing payment mechanism Collect savings Providing credits Financing international trades

12 Example; Creating Money Bank X gives A an overdraft of 200 to purchase a radio. A paid the vendor Vendor bank in the 200 in Bank B Bank B keep 20% as reserves and lend the balance

13 Example; Creating Money Radio vendors deposit = 200 Furniture vendor deposit = 200 x (80/100) = 160 Spare parts vendor deposits = 200 x (80/100) 2 = 128 And so on …… P = original value of deposits r = bank’s reserve ratio Total Deposits = P[1/r] = 200 x [(1/20)/100] = 1000

14 Finance Companies Accepting deposits for deposits accounts and other similar accounts Provide lending, leasing, hire-purchase Other business as permitted by central bank / MOF

15 Merchant Bank Accepting deposits for deposits accounts and other similar accounts Provide consultancy and advisory services related to corporate and investment matters Create / manage investment for other parties Other business as permitted by central bank / MOF

16 Other Banking System Islamic Banks - commercial banks operating under the islamic laws which forbidden the element of usury Discount Houses - financial intermediaries dealing specifically with short term investors and borrowers Labuan Offshore Banks - commercials banks which operates in financial offshore centers and permitted to operates in any currencies except of local currencies

17 Non-Banking Financial Intermediary System Matching the parties with excess and shortage of funds Non-banking financial intermediary system is under the direct control of various government department and agencies

18 Non-Banking Financial Intermediary System Non-Bank Financial Intermediaries Institutions of Development Finance Savings Institutions Provident & Pension Funds Insurance Companies Other Non-Bank Financial Institutions

19 Institutions of Development Finance Specific purpose of providing medium and long term capital, as well as mobilizing savings, economic activities and expertise with an aim to promote investment in the industrial and agricultural sectors The role of institutions of development finance complement the services offered by commercial banks and financial companies

20 Non-Banking Financial Intermediary System Savings Institutions -Institutions which promote and mobilize savings of the middle and lower income group -Depends mostly on network of branches to collect huge amount of savings Co-operatives - A society that aims to improve its members interest through co- operatives principles

21 Non-Banking Financial Intermediary System Provident & Pension Fund - Collect fund from workers and providing them with funds for retirement Insurance Companies -Funds collected as insurance premiums from policy holders for protection against calamities -Two types of insurance business; (i) Life, & (ii) General

22 Non-Banking Financial Intermediary System Unit Trust Companies Housing Credit Institutions Leasing & Factoring Companies Venture Capital Companies

23 Financial Markets: Money Market Trading ground between banks and those with short term money Trading of short term financial instruments quoted in RM The operations of money market consist of three categories; i.Placement of time & fixed deposits ii.Commercial financing iii.Buying & selling of money market financial papers

24 Money Market Financial Instruments -Treasury Bills -Government Investment Certificates -Bankers Acceptance -(Floating Rate) / Negotiable Certificates of Deposits Money Markets -Primary Market: depositing in FI’s -Secondary Market: FI’s trade deposits among themselves

25 Financial Markets Foreign Exchange Market -Trading of short term financial instruments quoted in foreign currencies -Two types of markets; (i) spot exchange market and (ii) forward market Capital Market -Trading of shares / securities -Two types of markets; (i) primary markets, and (ii) secondary markets

26 Thank You! Izdihar Md Daud Post Graduate Centre HP: