Bank Finance and Regulation Survey MALAYSIA Skrine

© Copyright Lex Mundi Ltd. 2011

2100 West Loop South, Ste. 1000 Houston, Texas 77027 USA Tel: 1.713.626.9393 www.lexmundi.com

Bank Finance and Regulation Survey

MALAYSIA

Skrine

CONTACT INFORMATION Skrine

Unit No. 50-8-1, 8th Floor Wisma UOA Damansara

50 Jalan Dungun Damansara Heights

50490 Kuala Lumpur, Malaysia 60.3.2081.3999

[email protected] Malaysia consists of Peninsular Malaysia and the states of Sabah, Sarawak and Federal Territory of Labuan located in the Borneo Island. The official monetary unit is Ringgit Malaysia ("RM"). Although the "financial services sector" in Malaysia includes the insurance and stock-broking industries, we have for the purposes of this questionnaire, confined our responses to the banking sector and to quasi-financial and quasi-credit institutions. I. BANKS AND FINANCIAL INSTITUTIONS SUPERVISION 1) Applicable laws and regulations. Provide a list of the main laws and regulations that refer to the supervision and control of banks and financial institutions. Give a brief summary of the substance of each of them. 1.1 The following are the principal legislation that regulate banks and financial institutions:-

1.1.1 Banking and Financial Institutions Act 1989 ("BAFIA") which provides for

the licensing, regulation and supervision of institutions that conduct banking, finance company, merchant banking, discount house and money-broking businesses. It also provides for the registration and, if necessary, the regulation of any 'scheduled business' or any institution that carries on the same.1

1 Refer to Paragraph 3.1.3 as to the businesses that comprise a "scheduled business" under BAFIA.



1.1.2 Islamic Banking Act 1983 ("IBA") which provides for the licensing, regulation and supervision of Islamic banking business and international Islamic banking business.

1.1.3 Labuan Financial Services and Securities Act 2010 ("LFSSA") which

provides for the licensing, regulation and supervision of institutions that conduct Labuan banking business, Labuan investment banking business and Labuan financial business.2

1.1.4 Payment Systems Act 2003 ("PSA") which provides for the regulation and supervision of payment systems and payment instruments (such as credit cards and electronic money). The PSA empowers Bank Negara Malaysia ("BNM"), the central bank of Malaysia, to designate a payment system as a "designated payment system" if such system poses systematic risks or the designation is necessary to protect the public. BNM may designate a payment instrument as a "designated payment instrument" if such instrument is widely used and it is necessary to protect public interest or maintain the reliability of that instrument.

Operators of designated payment systems and issuers of designated payment instruments are required to comply with specific requirements under the PSA.

1.1.5 Development Financial Institutions Act 2002 ("DFIA") which provides for the prescription of certain institutions as 'development financial institutions' ("DFIs") and for the regulation and supervision of such institutions.

DFIs are institutions established to develop and promote strategic sectors of the economy, such as agriculture, small and medium-sized enterprises, infrastructure and shipping. Institutions which have been prescribed as DFIs include Development and Infrastructure Bank of Malaysia Berhad, Industrial and Technology Bank of Malaysia Berhad, Export-Import Bank of Malaysia Berhad and Agricultural Bank of Malaysia.

1.1.6 Exchange Control Act 1953 (“ECA”) which empowers the Controller of

Foreign Exchange to regulate dealings in gold and foreign currencies, payments to and from residents, issuance of securities outside Malaysia, imports and exports and settlements.

1.2 The following are other legislations that affect banks, financial institutions and quasi-

financial and quasi-credit institutions:-

1.2.1 Moneylenders Act 1951 ("MLA") which provides for the licensing and regulation of money lending business and the protection of borrowers of money lent in the course of such business. Licensed banks, merchant banks and finance companies under BAFIA, Islamic banks and DFIs are exempted from the MLA.

1.2.2 Hire Purchase Act 1967 ("HPA") which regulates the conduct of hire purchase

business.

2 Refer to Paragraphs 6.3.1 to 6.3.3 as to the businesses that comprise "Labuan banking business”, “Labuan investment banking business” and “Labuan financial business" under LFSSA.



1.2.3 Money-Changing Act 1998 ("MCA") which provides for the licensing and regulation of money-changing business, including the buying of travelers’ cheques.

1.2.4 Anti-Money Laundering and Anti-Terrorism Financing Act 2001 ("AMLA")

which renders money laundering activity an offence and provides for measures to be taken by reporting institutions to prevent and detect such activity and for reporting of suspicious transactions.

Reporting institutions under AMLA include licensed institutions and scheduled institutions under BAFIA, Islamic banks and institutions that conduct Labuan banking business, Labuan investment banking business and Labuan financial business under LFSSA.3

2) Entities/Authorities in charge of the control and supervision. Purposes, powers and functions of each of them-their organization and structure (i.e. public or private, independency or body of the Government to which they belong, size, etc.) 2.1 The Minister of Finance ("MOF") – The powers and responsibilities of the MOF

include:- (a) approving the issue of licenses under BAFIA, IBA and LFSSA; (b) imposing restrictions on or revoking any license issued under BAFIA and IBA; (c) regulating particular aspects of the business and affairs of licensed institutions

under BAFIA; and (d) regulating particular aspects of the business and affairs of "scheduled

institutions" under BAFIA where the MOF is satisfied of the need to do so.

2.2 BNM – It is a statutory body incorporated under the Central Bank Act 2009 ("CBA"). Its functions and responsibilities include:- (a) promoting and maintaining banking and financial services to the public; (b) establishing the policy to be followed by banking institutions in relation to

advances and credit facilities to be granted by them; (c) making recommendations on interest and discount rates and commissions

chargeable by banking institutions (other than Islamic banks); (d) making recommendations on reserves to be maintained by banking institutions; (e) supervising and regulating banking and financial institutions under BAFIA and

IBA;

3 First Schedule, AMLA.



(f) making policies with respect to institutions regulated under BAFIA, IBA, DFIA

and MCA; and (g) the administration of AMLA and PSA.

2.3 Labuan Financial Services Authority ("Labuan FSA") – It is a statutory body established under the Labuan Financial Services Authority Act 1996. Its primary functions include:-

(a) supervising the activities and operations of Labuan financial institutions,

including Labuan banks and Labuan investment banks; (b) overseeing the promotion and development of the Labuan International Business

and Financial Centre.

2.4 Securities Commission ("SC") – The SC is a statutory body established under the Securities Commission Act 1993. It is the primary regulatory authority over capital markets activities.

3) Describe briefly the activities under supervision and give a list of the different types of licenses available. 3.1 BAFIA

Licensed Businesses

3.1.1 The following businesses require a license under BAFIA:-

(a) banking business; (b) finance company business; (c) merchant banking business; (d) discount house business; and (e) money-broking business.4

3.1.2 A company that is licensed to carry on a licensed business is defined as a "licensed institution" under BAFIA.

Scheduled Business

3.1.3 Each of the following is a "scheduled business" under BAFIA:-

(a) building credit business;

4 Section 4, BAFIA.



(b) development finance business; (c) factoring business; and (d) leasing business.5

3.1.4 A company that wishes to carry on a scheduled business is required to deposit prescribed information and documents with BNM and to obtain written acknowledgement of such compliance from BNM before it can commence such business.6

3.1.5 If the MOF is satisfied that it is necessary to regulate any particular scheduled business or any category of scheduled businesses, he may publish an order to extend certain of the regulatory powers in BAFIA over the particular scheduled business or category of scheduled businesses.7

Representative Office 3.1.6 Subject to the prior written approval of BNM and compliance with the relevant

statutory requirements, a foreign institution (as defined in BAFIA) may set up a representative office in Malaysia.8

3.1.7 A representative office is not permitted to carry on any licensed business or scheduled business and may only conduct the activities or business specified by BNM.9

3.1.8 If the MOF is satisfied that it is necessary to regulate any particular representative office or representative offices generally, he may publish an order to extend certain of the regulatory powers in BAFIA over the particular representative office or representative offices generally.10

3.2 IBA

Islamic Banking Business

3.2.1 Islamic banking business may be transacted only by a licensed Islamic bank under IBA.11

3.2.2 Islamic banking business is defined in Section 2 of IBA as banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam.

5 Refer to the Third Schedule, BAFIA. 6 Section 19(1), BAFIA. 7 Section 24(1), BAFIA. 8 Section 20(1), BAFIA. 9 Sections 20(2) and (3), BAFIA. 10 Section 24(1), BAFIA. 11 Section 3(1), IBA.



International Islamic Banking Business 3.2.3 International Islamic banking business may be transacted only by an Islamic

bank, a company or a foreign institution licensed under IBA.12

3.2.4 International Islamic banking business is defined in Section 2 of IBA as Islamic banking business in currencies other than Ringgit or such other Islamic banking business as BNM may specify.

3.3 LFSSA

Licensed Businesses

3.3.1 The conduct of the following businesses require a license under LFSSA.13

(a) Labuan banking business; (b) Labuan investment banking business; and (c) Labuan financial business.

3.3.2 The businesses may be carried out in any currency including Ringgit where

permitted by the ECA or such other relevant law in force.14

4) Describe briefly non-regulated financial and banking activities.

4.1 There is a variety of consumer credit and quasi-credit facilities available in Malaysia provided by quasi-credit institutions. Some forms of such credit are subjected to minimal regulatory oversight while others may lie within a grey area or are not subjected to any regulatory supervision. These include the following:-

Money lending business 4.1.1 Moneylenders are licensed under the MLA. The MLA contains provisions that

regulate the conduct of money lending business, such as forms of money lending agreements to be used and the maximum rate of interest chargeable by moneylenders. The regulatory supervision over licensed moneylenders is significantly less stringent as compared to the supervision over licensed institutions under BAFIA.

12 Section 30A, IBA. “Foreign institution” is defined under Section 2 of IBA as a foreign company which carries on business outside Malaysia which is similar to the Islamic banking business under IBA or the business of a licensed bank under BAFIA. 13 Section 87(1), LFSSA. 14 Refer to definitions of “Labuan banking business”, “Labuan investment banking business” and “Labuan financial business” in Section 86, LFSSA.



4.1.2 The MLA falls under the jurisdiction of the Minister of Housing and Local Government. Money lending licences are issued by the Registrar of Moneylenders.

Hire-purchase business 4.1.3 The conduct of hire purchase business is governed by the HPA. The HPA only

applies to prescribed goods, such as consumer items and motor vehicles ("scheduled goods") and does not extend to other goods.

4.1.4 The HPA contains provisions that regulate the conduct of hire-purchase business

in relation to scheduled goods. These provisions include limitation on terms charges, prescription of minimum deposits and procedures to be complied with for repossession.

4.1.5 The HPA does not set down any licensing requirements and institutions which

conduct such business are largely unregulated. 4.1.6 The administration of the HPA falls under the jurisdiction of the Minister of

Domestic Trade, Co-operatives and Consumerism. Pawn broking business

4.1.7 Pawn broking business is licensed under the Pawnbrokers Act 1972. This Act

contains provisions that regulate the conduct of pawn broking business, such as the maximum permissible charges, the minimum redemption period for pledges and the pawnbroker's rights in relation to unredeemed goods. Regulatory oversight of licensed pawnbrokers is minimal.

Payment Instruments 4.1.8 A person is required to obtain the written approval from BNM before issuing a

"designated payment instrument" under the PSA. Credit cards, charge cards and electronic money have been prescribed as designated payment instruments.15

4.1.9 The regulatory supervision by BNM over issuers of designated payment instruments is less stringent than the supervision of licensed institutions under BAFIA.

Credit sales

4.1.10 This activity is carried out by some retail outlets of consumer goods such as furniture and electrical products. Consumers are required to pay for goods purchased by periodic installments. This activity is largely unregulated.

4.1.11 The provisions of the HPA which apply to scheduled goods are excluded from

credit sales transactions through arrangements whereby a credit card issuer will pay the purchase price in full to the supplier of the goods and allow the credit

15 Payment Systems (Designated Payment Instruments) Order 2003 (P.U.(A) 398/2003).



card holder to settle the same by agreed installments, on an interest-free or minimal interest basis.

5) Describe briefly non-permitted financial and banking activities and/or government monopolies.

There is no general prohibition against banking and financial business in Malaysia so long as the relevant licensing or registration requirements under the relevant legislation are complied with. There is no government monopoly over any specific area of banking and financial business.

II. BANKING ACTIVITIES 6) Different types of banking licenses. Activities permitted under each of them. Activities prohibited. 6.1 BAFIA

Banking license

6.1.1 The holder of a banking license is permitted to carry on the following

businesses:- (a) receiving deposits on current account, deposit account, savings account

or other similar account; (b) paying or collecting cheques drawn by or paid in by customers; (c) provision of finance; and (d) such other business as BNM, with the approval of the MOF, may

prescribe.16

Banking and Finance Company

6.1.2 A "banking and finance company", namely, an institution that holds both a license to carry on banking business and a license to carry on finance company business is permitted to carry on the following businesses:-

(a) banking business, as described in paragraph 6.1.1(a) to (d) above; (b) giving of credit facilities; (c) leasing business; (d) hire-purchase business, including those subject to the HPA;

16 Refer to definition of "banking business" in Section 2(1), BAFIA.



(e) acquiring rights and interests in a hire-purchase, leasing or other similar

transaction; and (f) such other business as BNM, with the approval of the MOF, may

prescribe.17

Merchant Banking License 6.1.3 The holder of a merchant banking license is permitted to carry on the following

businesses:-

(a) receiving deposits on deposit account; (b) provision of finance; (c) providing consultancy and advisory services relating to corporate and

investment matters;

(d) making or managing investments on behalf of any person; and

(e) such other business as BNM, with the approval of the MOF, may prescribe.18

6.1.4 The holder of a merchant banking license is permitted to deal in foreign currency and to carry out transactions in any form of derivatives if they satisfy the criteria specified by BNM from time to time and subject to such conditions and restrictions as may be imposed by BNM.19 The holder of a merchant banking license may also carry on investment banking business subject to such terms, conditions, restrictions or limitations as BNM may specify.20

6.2 IBA Islamic Banking License 6.2.1 The holder of an Islamic banking license is permitted to carry on Islamic banking

business.21

International Islamic Banking License 6.2.2 The holder of an international Islamic banking license is permitted to carry on

Islamic banking business in currencies other than Ringgit or such other Islamic banking business as BNM may specify.22

17 Refer to definition of "banking and finance company" in Section 2(1), BAFIA.

18 Refer to definition of "merchant banking business" in Section 2(1), BAFIA. 19 Banking and Financial Institutions (Licensed Merchant Banks)(Additional Business) Order 1995 (P.U.(A) 406/95). 20 Banking and Financial Institutions (Licensed Merchant Banks)(Additional Business) Order 2007 (P.U.(A) 118/2007). Refer to definition of “investment banking business” in the same Order. 21 Refer to Paragraph 3.2.2 for definition of Islamic banking business. 22 Refer to definition of “international Islamic banking business” in Section 2, IBA.



6.3 LFSSA

Labuan Banking License 6.3.1 The holder of a Labuan banking license is permitted to carry on the following

businesses:-

(a) receiving deposits on current account, deposit account, savings account, or any other accounts as may be specified by the Labuan FSA;

(b) Labuan investment banking business; (c) Labuan financial business; (d) Labuan Islamic banking business; and (e) such other business as the Labuan FSA, with the approval of the MOF,

may specify.23

Labuan Investment Banking License

6.3.2 The holder of a Labuan investment banking license is permitted to carry on the following businesses:- (a) providing credit facilities; (b) providing consultancy and advisory services relating to corporate and

investment matters, including dealing in securities, or making and managing investments on behalf of any person;

(c) undertaking foreign exchange transactions, interest rate swaps, dealings

in derivative instruments or derivative financial instruments or any other similar risk management activities;

(d) Labuan Islamic investment banking business; (e) Labuan financial business; and (f) such other business as the Labuan FSA, with the approval of the MOF,

may specify.24

Labuan Financial License 6.3.3 The holder of a Labuan financial license is permitted to carry on the following

businesses:-

(a) building credit business; 23 Refer to definition of "Labuan banking business" in Section 86, LFSSA. 24 Refer to definition of "Labuan investment banking business" in Section 86, LFSSA.



(b) credit token business; (c) development finance business; (d) leasing business; (e) factoring business; (f) money-broking business; (g) Labuan Islamic financial business; and (h) such other business as may be specified by the Labuan FSA.25

Currency of Transaction

6.3.4 Licensed Labuan banks may transact business in Malaysia in any currency including Ringgit where permitted by the ECA or such other relevant law in force.26

7) Procedures to be followed and requirements to be met to obtain each of the different licenses. Formalities to be fulfilled, documentation to be submitted, guaranties requested, time estimation, etc. 7.1 BAFIA

Application Requirements 7.1.1 An application for a banking license or merchant banking license must be made

in writing to the MOF and submitted through BNM together with the following:-

(a) a copy of the incorporation or constituent documents; (b) a copy of the latest audited balance sheet; (c) a statement on the following:-

(i) the name, place and date of the establishment of the applicant

and of its related corporations; (ii) the sources of the applicant’s funds and the purposes for which

and the manner in which they are utilized;

25 Refer to definition of "Labuan financial business" in Section 86, LFSSA. 26 Refer to definitions of “Labuan banking business”, “Labuan investment banking business” and “Labuan financial business” in Section 86, LFSSA.



(iii) the principal business and field of operations of the applicant and of its related corporations; and

(iv) the names and addresses of the directors and substantial

shareholders of the applicant and its related corporations; and

(d) such other information or documents as may be specified or required by BNM.27

Minimum Requirements 7.1.2 The minimum criteria which an applicant must fulfill are set out in the Second

Schedule to BAFIA. They may be summarized as follows:-

(a) Every person who is, or is to be, a director, controller or manager of the institution is a fit and proper person to hold the particular position which he holds or is to hold;

(b) The business of the institution is to be directed by at least two (2)

individuals; (c) The board of directors include such number of non-executive directors as

BNM considers appropriate having regard to the circumstances of the institution and the nature and scale of its operations;

(d) The institution conducts, or will conduct, its business in a prudent

manner; (e) The institution will carry on its business with integrity and

professionalism appropriate to the nature and scale of its activities; (f) The shareholding structure of the institution complies with the economic

policy of Malaysia; and (g) Such other criteria as BNM may prescribe.

7.1.3 Details as to the factors and circumstances to be considered in determining

whether the minimum criteria are fulfilled are set out in the Second Schedule.

License Fees 7.1.4 Section 44 authorizes the MOF to prescribe various license fees payable by a

licensed institution. The fees presently are as follows28

:-

(a) Upon the institution being licensed:- (i) a licensed bank – RM100,000;

27 Section 5(1), BAFIA. 28 Banking and Financial Institutions (Licence Fee)(Licensed Institutions) Order 2004 (P.U.(A) 188/2004).



(ii) a licensed bank which is a banking and finance company –

RM150,000; (iii) a licensed merchant bank – RM100,000;

(b) Upon obtaining BNM's consent to open any office other than the principal place of business:- (i) a licensed bank – RM10,000; (ii) a licensed bank which is a banking and finance company –

RM10,000; (iii) a licensed merchant bank – RM10,000; (iv) if the place of business of a licensed bank or a licensed bank

which is a banking and finance company is a money changing booth or a mobile place of business - RM500;

(c) Annual fee

(i) a licensed bank:-

• an office at the principal place of business – RM100,000; • each office other than the principal place of business –

RM10,000; • each office that is a money changing booth or a mobile

place of business - RM500;

(ii) a licensed bank which is a banking and finance company:- • an office at the principal place of business – RM150,000; • each office other than the principal place of business –

RM10,000; • each office that is a money changing booth or a mobile

place of business - RM500; (iii) a licensed merchant bank:-

• an office at the principal place of business – RM100,000; • each office other than the principal place of business –

RM10,000.

7.2 IBA Application Requirements

7.2.1 An application for an Islamic banking license or international Islamic banking

license must be submitted in writing to the MOF and submitted through BNM together with the following:-

(a) a copy of the incorporation or constituent documents; and



(b) such other document or information as may be required by the MOF or

BNM (in the case of an application for an international Islamic banking license).29

Conditions for Approval 7.2.2 BNM shall not recommend that a license be granted and the MOF shall not grant

a license unless they are satisfied that:-

(a) the aims and operations of the proposed banking business will not involve any element which is not approved by the Religion of Islam; and

(b) provision is made in the articles of association of the applicant for the

establishment of a Syariah advisory body as may be approved by BNM.30

License Fee 7.2.3 Section 9 authorizes the MOF to prescribe the annual license fee payable by a

licensed Islamic bank. The annual fee presently is RM100,000 for a head office and RM10,000 for every branch office.31

Syariah Advisory Body 7.2.4 An Islamic bank and international Islamic bank must establish a Syariah advisory

body, as may be approved by BNM, to advise on its Islamic banking business or international Islamic banking business to ensure that such business does not involve any element which is not approved by the Religion of Islam.32

7.3 LFSSA

Eligibility

7.3.1 Only the following entities are eligible to conduct Labuan banking business, Labuan investment banking business or Labuan financial business:-

(a) a Labuan company or a foreign Labuan company incorporated or

registered under the Labuan Companies Act 1990 ("LCA"); or

(b) a Malaysian bank.33

Application Requirements

29 Sections 3(2) and 30B(1), IBA. 30 Section 3(5), IBA. 31 Notification under Section 9, IBA (P.U.(B)358/94). 32 Sections 3(5)(b) and 30E(1), IBA. 33 Section 87(1), LFSSA.



7.3.2 An application for a license to carry on Labuan banking business or Labuan investment banking business shall be made in writing to the Labuan FSA together with the following:-

(a) a copy of the incorporation or constituent documents of the applicant;

(b) a statement on the following:-

(i) the name, place and date of establishment of the applicant; (ii) the principal business and the principal place of business of the

applicant; and (iii) the names and addresses of the directors of the applicant and the

participants who each hold 10% or more of the paid-up capital of the applicant;

(c) where an applicant is a Labuan company or Malaysian bank, a statement

on the names, addresses, qualifications, working experience and proposed positions of all officers who would be responsible for the management of the applicant's Labuan banking business or Labuan investment banking business;

(d) where an applicant is a Labuan company or a foreign Labuan company, a proposed amendment, if required, to its constituent documents to the effect that the sole and exclusive object of the Labuan company or foreign Labuan company shall be the carrying on of Labuan banking business or Labuan investment banking business;

(e) a copy of the audited balance sheets for the three financial years

immediately preceding the date of the application of:- (i) the applicant, where it is a foreign Labuan company or a

Malaysian bank; or

(ii) the applicant and its holding company, where the applicant is a Labuan company which is a subsidiary of another company; or

(iii) the applicant and each participant who holds 10% or more of the

paid-up capital of the applicant, where the applicant is a Labuan company which is not a subsidiary of any corporation;

(f) in the case where an applicant is a Labuan company, a guarantee secured

and an undertaking given, and, in the case of an application by a foreign Labuan company, an undertaking given, in such manner and form acceptable to the Labuan FSA, which, inter alia, provides that:-

(i) the applicant shall comply with the financial obligations and

requirements imposed under LFSSA and shall meet the



applicant’s liabilities in respect of its Labuan banking business or Labuan investment banking business;

(ii) where the applicant is a Labuan company, none of its

participants who holds 10% or more of the applicant’s paid-up capital shall be changed without the prior written approval of the Labuan FSA and, where the applicant is a foreign Labuan company, it shall promptly notify the Labuan FSA of any change in its participants who hold 10% or more of its paid-up capital; and

(iii) every director or the principal officer of the applicant responsible

for the management of its Labuan banking business or Labuan investment banking business shall be a fit and proper person and the appointment of such director or chief executive officer shall only be made after consultation with the Labuan FSA.34

7.3.3 An application for a Labuan banking license or a Labuan investment banking license by a proposed Labuan company that is to be incorporated under the LCA or a foreign company that seeks to be registered as a foreign Labuan company under the LCA must comply substantially with the requirements set out in paragraphs (a) to (f) above.35

7.3.4 An application for a license to carry on Labuan financial business shall be made in writing by or on behalf of the applicant to the Labuan FSA and shall be accompanied by such documents, statements and information as may be specified by the Labuan FSA.36

7.3.5 The Labuan FSA may, before an application is determined, require the applicant to provide such additional information or documents as the Labuan FSA deems necessary to determine the suitability of the applicant for the license.37

License Fee

7.3.6 A licensed Labuan bank shall pay such annual license fee of such amount or calculated at such rate as may be prescribed by the Labuan FSA.38 The prescribed annual license fee is presently RM80,000, or its equivalent in foreign currency.39 Such fee is payable on or before the 15th of January of every year following the year in which a license is granted under LFSSA.40

34 Sections 88(2), 88(4) and 89, LFSSA 35 Section 88(3) and (5), LFSSA. 36 Section 90, LFSSA. 37 Section 91, LFSSA. 38 Section 189(1), LFSSA. 39 Item 11 of the Third Schedule, Labuan Financial Services and Securities Regulations 2010 (P.U.(A) 416/2010) 40 Section 189(2), LFSSA.



8) Legal structure admitted/requested for each of the different licenses.

a) Different types of legal structures that may be used, i.e. corporations, limited liability partnership, branches, subsidiaries, etc.

8.1 BAFIA

8.1.1 To be eligible to hold a banking license, a merchant banking license or to be a bank and finance company, an entity must be a public company, namely, a company incorporated under the Companies Act 1965 ("CA") and has the status of a public company.41

A public company need not be a listed company and may have a single shareholder.

8.1.2 Subject to the prior written consent of BNM, a licensed bank or licensed merchant bank is permitted to establish branches (which form part of the same legal entity) within or outside Malaysia.42

8.2 IBA

8.2.1 To be eligible to hold an Islamic banking license, an entity must be a company incorporated under the CA.43

8.2.2 To be eligible to carry on international Islamic banking business, an entity must be:-

(a) an Islamic bank licensed under the IBA; or

(b) a company incorporated under the CA or a foreign institution

which holds a valid license to carry on international Islamic banking business.44

8.2.3 Subject to the written consent of BNM, a licensed Islamic bank and licensed international Islamic bank is permitted to establish branches (which form part of the same legal entity) within or outside Malaysia.45

8.3 LFSSA 8.3.1 To be eligible to hold a Labuan banking license, a Labuan investment

banking license or a Labuan financial business license, an entity must be:-

(a) a Labuan company or a foreign Labuan company incorporated or

registered under the LCA; or

41 Section 4(a), BAFIA 42 Section 30, BAFIA. 43 Section 3(1), IBA. 44 Section 30A(1), IBA. Refer to Section 2 of the IBA for definition of “foreign institution.” 45 Sections 7 and 30E(1), IBA.



(b) a Malaysian bank, namely a licensed bank, as defined in BAFIA or a licensed Islamic bank, as defined in IBA.46

8.3.2 A person licensed to carry on any activities under LFSSA shall carry on such activities only in, from or through Labuan except that a licensed entity may carry on such business in Malaysia outside Labuan as may be permitted by the Labuan FSA from time to time.47

8.3.3 A licensed Labuan bank which is a Labuan company may, subject to the prior written consent of the Labuan FSA, open any office other than its principal place of business in Labuan, or acquire or establish any subsidiary.48

b) Capital requirements and own fund rules.

8.4 BAFIA

Maintenance of Capital Funds 8.4.1 A licensed institution is required at all times to maintain such capital

funds, unimpaired by losses, as specified by BNM.49

8.4.2 Presently the minimum capital funds are:- (a) RM300 million, unimpaired by losses, where a licensed bank is

more than 51% owned by any foreign person; and

(b) RM2 billion, unimpaired by losses, in the case of any other licensed bank, or licensed merchant bank, such capital may be either by itself or in aggregation with the capital funds of its related corporation that is a licensed bank, licensed merchant bank or licensed finance company.50

Maintenance of Reserve Funds 8.4.3 A licensed institution must maintain a reserve fund and transfer to such

fund, out of its net profits for each year (after provision for taxation), such amount specified in BAFIA before declaring any dividend.51

8.4.4 The reserved fund may, subject to approval of BNM, be applied in paying up unissued shares to shareholders by way of fully-paid bonus shares but may not be used to pay dividend.52

46 Section 87, LFSSA. 47 Section 5(1), LFSSA. 48 Section 97, LFSSA. 49 Section 37(1), BAFIA. 50 Banking and Financial Institutions (Minimum Amount of Capital Funds) Order 2001 (P.U.(A) 62/2001). 51 Sections 36(1) and 36(2), BAFIA. 52 Sections 36(3) and 36(4), BAFIA.



Other Requirements 8.4.5 A licensed institution may be required to maintain a minimum amount of

liquid assets and a minimum amount of assets in Malaysia as specified by BNM.53

8.5 IBA Maintenance of Capital Funds 8.5.1 A licensed Islamic bank and licensed international Islamic bank may be

required to maintain capital funds, unimpaired by losses, in such proportion to its assets within and/or outside Malaysia as BNM may by written notice prescribe.54

8.5.2 The prescribed minimum capital funds of a licensed Islamic bank is RM300 million55 and RM10 million in the case of a licensed international Islamic bank which is a company56, but these amounts may be modified by written notice by BNM.57

Maintenance of Net Working Funds

8.5.3 A licensed international Islamic bank which is a foreign institution may be required to maintain net working funds, unimpaired by losses, in such proportion to its net liabilities outside Malaysia as BNM may by written notice prescribe.58

8.5.4 The prescribed minimum net working funds of a licensed international Islamic bank which is a foreign institution is RM10 million.59

Maintenance of Reserve Funds 8.5.5 A licensed Islamic bank must maintain a reserve fund and transfer to

such fund, out of its net profits for each year (after provision for zakat or taxation), such amount specified in IBA before declaring any dividend.60 An international Islamic bank is exempted from this requirement.61

Liquid Assets

53 Sections 38 and 39, BAFIA. 54 Sections 14(1) and 30D(1), IBA. 55 Notification under Section 5(2), IBA (P.U.(B) 364/2008). 56 Notification under Section 30D(2), IBA (P.U.(B) 365/2008). 57 Section 14(2), IBA. 58 Section 30D(1), IBA. 59 Notification under Section 30D(2), IBA (P.U.(B) 365/2008). 60 Section 15(1), IBA. 61 Islamic Banking (Exemption) Order 2008 (P.U.(A) 401/2008).



8.5.6 A licensed Islamic bank may be required to hold a minimum amount of liquid assets as prescribed by BNM in a written notice to that bank.62 An international Islamic bank is exempted from this requirement.63

8.6 LFSSA

Maintenance of Capital Funds 8.6.1 A licensed Labuan bank must maintain at all times a capital fund,

unimpaired by losses, of not less than RM10 million or its equivalent in any foreign currency in cash or such amount as may be specified in writing by the Labuan FSA.64

c) Transfer of control and ownership regime. Is it regulated?

8.7 BAFIA 8.7.1 Section 45(1) imposes an obligation on a person to obtain the prior

written approval of the MOF before he enters into an agreement or arrangement to:-

(a) acquire, together with any interests in shares already held (if any) by the acquirer or by persons acting in concert with him, not less than 5% interest in the shares of a licensed institution; or

(b) dispose, together with the interests in shares previously disposed by him to any single person or any persons acting in concert, to such single person or such persons acting in concert not less than 5% interest in the shares of a licensed institution.

8.7.2 As a general rule, Section 46(1) permits an individual to hold a

maximum of 10% and a person other than an individual to hold a maximum of 20% of interests in shares of a licensed institution.65 The MOF may exempt an individual or institution from the foregoing restrictions if he is satisfied that it would not be prejudicial to the promotion of a sound financial structure in Malaysia and contrary to the public interest to do so.66

8.7.3 An individual who holds 10% or more or a person (other than an individual) who holds 20% or more of interest in shares of a licensed institution is required to notify BNM in writing of any intention to dispose of any of his interest and to continue to notify BNM of further intention to dispose any of his interest so long as that individual or other

62 Section 16(1), IBA. 63 Islamic Banking (Exemption) Order 2008 (P.U.(A) 401/2008). 64 Section 92(5), LFSSA. 65 Refer to Section 46(2) to 46(4) for the rules of aggregation that apply in determining the interests in shares of an individual and other person. 66 Section 46(1), BAFIA.



person holds not less than 5% of interest in shares of the licensed institution.67

8.7.4 Section 49(1) prohibits any person from entering into an agreement or arrangement:-

(a) which results in a change in control of a licensed institution or its holding company;

(b) for the sale, disposal or transfer of the whole or any part of the business of a licensed institution;

(c) for the amalgamation or merger of a licensed institution with any other person; or

(d) for the reconstruction of a licensed institution;

unless the proposed agreement or arrangement is in writing and all parties thereto have applied in writing to and obtained the approval of the MOF to such agreement or arrangement.

8.7.5 Sections 45(1) and 49(1) are strictly construed and preclude a person

from commencing any negotiations until BNM's approval is obtained.

8.8 IBA 8.8.1 Whenever a change is about to occur in the control of a licensed Islamic

bank and licensed international Islamic bank, that bank shall report the proposed change to BNM.68

8.8.2 A licensed Islamic bank and licensed international Islamic bank (which is a company) is required to obtain the prior approval of the MOF of any proposed:-

(a) arrangement or agreement –

(i) for the sale or disposal of its shares or business; or

(ii) affecting voting power, management or other matters;

which will result in a change in its control or management; and (b) scheme –

(i) for reconstruction of the licensed Islamic bank;

(ii) for amalgamation, merger or otherwise between the licensed Islamic bank and any other corporation;

67 Section 46(5), BAFIA. 68 Sections 21(1) and 30E(1), IBA.



wherein the whole or any part of its undertaking or the property is to be transferred to another corporation.69

8.9 LFSSA 8.9.1 No participant of the licensed Labuan bank who holds 15% or more of

the paid-up capital of the licensed Labuan bank shall be changed without the prior written approval of the Labuan FSA, and where the licensed Labuan bank is a foreign Labuan company, it shall promptly notify the Labuan FSA of any change in its participants who hold 15% or more of its paid-up capital.70

d) Personal requirement and restrictions that may apply in each case for officers, directors, shareholders, etc.

8.10 BAFIA

Fit and proper person 8.10.1 Every person who is a controller71, director or manager of a licensed

institution must be a fit and proper person to hold the position which he holds.72

Appointment of Directors

8.10.2 The prior written consent of BNM is required before any person may accept an appointment or election as a director of a licensed institution.73

Disqualification of Director or Officer

8.10.3 A person is automatically disqualified from being appointed or elected or from continuing to hold office as a director, manager, secretary or other officer concerned in the management, of a licensed institution if:-

(a) he is a bankrupt, has suspended payment or has compounded

with his creditors; (b) he is convicted of an offence relating to dishonesty, fraud or

violence punishable with imprisonment of one year or more in any court;

(c) he is convicted of any offence under BAFIA;

69 Sections 22(1) and 30E(1), IBA. 70 Section 95(4), LFSSA. 71 "controller" is defined in Section 2(1) of BAFIA as a person who (a) holds more than 50% of the issued shares of an institution, or (b) has the power to appoint a majority of the directors of an institution, or (c) has the power to make decisions in respect of the management or administration of an institution and to give effect to such decisions. 72 Paragraph 1(1), Second Schedule, BAFIA. 73 Section 55(1), BAFIA.



(d) any detention, supervision, restricted residence, banishment or

deportation order has been made against him or any restriction or supervision has been imposed on him under any laws relating to prevention of crime, drug trafficking or immigration; or

(e) unless otherwise permitted by the MOF, he has been a director

of, or directly concerned in the management of, any corporation which is wound up by a court or other competent authority, or of any licensed institution whose license has been revoked under BAFIA.74

Appointment of Chief Executive

8.10.4 A licensed institution shall obtain the prior written approval of BNM before appointing a chief executive.75 The appointee must be an individual and be resident in Malaysia during the tenure of his appointment.76

Credit Facilities

8.10.5 Unless exempted in writing by BNM, a licensed institution is prohibited from granting any credit facilities to:-

(a) any director or officer;

(b) any body corporate, unincorporate, or a sole proprietorship, in

which any of its directors or officers is a director or manager or for which any of its directors or officers is a guarantor or an agent;

(c) any corporation in which any of its directors or officers has an

interest in shares thereof;

(d) any person for whom any of its directors or officers has given any guarantee or other undertaking that involves financial liability.77

8.10.6 Exceptions to the above prohibitions are:- (a) a credit facility to an officer (including an executive director)

under his scheme of service, or if no such scheme exists, a loan given on compassionate or special grounds for an amount not exceeding 6 months salary (or such greater amount approved by BNM);78

74 Section 56(1), BAFIA.

75 Section 57(2), BAFIA. 76 Section 57(1), BAFIA. 77 Section 62(1), BAFIA. 78 Section 62(2), BAFIA.



(b) a housing loan to the spouse, child or parent of an officer

(including an executive director);79

and

(c) a credit facility to a corporation in which none of its directors and officers has any material interest in the shares of that corporation.80

8.10.7 For the purpose of the above provisions, a director or officer is defined to include the spouse, child or parent of a director or officer.81

Disclosure of Director’s Interest 8.10.8 Every director who has any interest in a proposed credit facility, directly

or indirectly and in any manner, to be given to any person by the licensed institution must declare his interest in writing in accordance with the requirements of BAFIA.82

8.10.9 In addition, every director who holds any office, or possesses any property, whereby, directly or indirectly, duties or interests might be created in conflict with his duties or interests as a director of a licensed institution, shall declare at a meeting of the directors of such licensed institution the fact of his holding such office or possessing such property and the nature, character and extent of the conflict.83

8.11 IBA

Disqualification of Director or Officer 8.11.1 Any person who is a director, manager, secretary or other officer

concerned in the management of a licensed Islamic bank or licensed international Islamic bank shall cease to hold office if he becomes a bankrupt, suspends payment or compounds with his creditors or is convicted of an offence involving dishonesty or fraud.84

8.11.2 A person who has been a director of, or directly concerned in the management of, a licensed Islamic bank, a licensed international Islamic bank or a licensed bank which has been wound up by a court shall, without the express consent of the MOF, act or continue to act as a director of, or be directly concerned in the management of an Islamic bank or international Islamic bank.85

Credit Facilities

79 Section 62(3)(a), BAFIA. 80 Section 62(3)(b), BAFIA. 81 Section 62(4), BAFIA. 82 Sections 64(1) to (3), BAFIA. 83 Sections 64(4) and (5), BAFIA. 84 Sections 23(1) and 30E(1), IBA. 85 Sections 23(2) and 30E(1), IBA.



8.11.3 Unless exempted by BNM, a licensed Islamic bank and licensed

international Islamic bank is prohibited from granting any advances, loans or credit facilities to:-

(a) any director, officer or employee;

(b) any firm in which any of its directors, officers or employees is

interested as a partner, manager, agent or guarantor;

(c) any corporation in which any of its officers (including executive directors) or employees is a director, manager, agent or guarantor or any corporation in which any of its officers (including executive directors) or employees has any material interest as determined by BNM;

(d) any corporation in which any of its directors (not being an

executive director) is a member, director, manager, agent or guarantor or any corporation in which such director of the bank has any interest, directly or indirectly;

(e) any individual for whom any of its directors, officers or

employees is a guarantor.86

8.11.4 Exceptions to the above prohibitions are:- (a) loans to officers (including executive directors) or employees

under its appropriate scheme of service and where the bank is satisfied that special or compassionate grounds exist, a loan not exceeding 6 months remuneration of that officer or employee;87

(b) advances, loans or credit facilities to:-

(i) a corporation which is listed on a recognized stock exchange and in the shares of which no director of the Islamic bank or international Islamic Bank has, directly or indirectly, any material interest as determined by BNM; or

(ii) a public company in which a director has no interest in

his personal capacity, as determined by BNM;

Provided that the director concerned must not be an executive director.88

86 Section 25(1) and 30E(1), IBA. 87 Section 25(2) and 30E(1), IBA. 88 Section 25(4) and 30E(1), IBA.



8.11.5 For the purpose of the above provisions, a director, officer or employee is defined to include the spouse, child or parent of a director, officer or employee.89

Disclosure of Director’s Interest 8.11.6 Every director who has any interest, directly or indirectly and in any

manner, in an advance, loan or credit facility or a proposed advance, from that Islamic bank or international Islamic Bank (which is a company) must declare his interest in writing in accordance with the requirements of IBA.90

8.11.7 In addition, every director who holds any office or possesses any property whereby, directly or indirectly, duties or interests might be created in conflict with his duties or interests as a director of the Islamic bank or international Islamic bank (which is a company), shall declare at a meeting of the directors of such bank the fact and the nature, character and extent of the conflict.91

8.12 LFSSA

8.12.1 The LFSSA has no statutory prohibitions or restrictions on shareholders,

directors or officers of licensed Labuan banks. However, it is possible that a Labuan company or a foreign Labuan company which is a licensed Labuan bank may have undertaken to ensure that every director or principal officer responsible for the management of its Labuan banking business shall be a fit and proper person and the appointment of such director or principal officer may only be made after consultation with the Labuan FSA.92

Fit and proper person

8.12.2 A licensed Labuan bank must ensure that its directors or principal officers remain as fit and proper persons throughout their appointment.93

8.12.3 In determining whether a person is a fit and proper person the Labuan FSA may take into consideration the following:-

(a) integrity, competence, soundness of judgment and financial

standing;

(b) whether he has been adjudged a bankrupt, in Malaysia or elsewhere;

89 Section 25(5), IBA. 90 Sections 28(1), 28(3) and 30E(1), IBA. 91 Sections 28(4), 28(5) and 30E(1), IBA. 92 Sections 88(2)(iii) and 88(4)(e)(iii), LFSSA. 93 Section 4(1), LFSSA.



(c) whether he has been convicted of a criminal offence in Malaysia or elsewhere and where the penalty imposed is imprisonment of one year or more, whether in itself or in addition to a fine; and

(d) such other criteria as may be specified in guidelines issued by

the Labuan FSA.94

e) Special requirements/restrictions for foreigners either individual or legal entities (including short description of WTO/GATS commitments and exemptions).

General Agreement on Trade in Services ("GATS")

8.13 The special requirements/restrictions on foreign participation in the banking

industry can be elicited from Malaysia's commitments under GATS.95

They include the following:-

Off-shore Banking 8.13.1 Foreign banks are permitted to establish commercial presence in the

Labuan International Offshore Financial Centre through a registered branch office or a Malaysian incorporated subsidiary.

On-Shore Banking 8.13.2 A commitment that 13 existing wholly-foreign owned commercial banks

be permitted to remain wholly-owned by their existing shareholders.

8.13.3 No commitment for the issue of any new banking licenses.

8.13.4 Foreign participation in the banking sector is allowed through equity participation in existing Malaysian-owned or controlled commercial banks and merchant banks, subject to the following limitations:-

(a) The maximum foreign ownership is limited to 30%;

(b) Shareholding by a single person individually or jointly with

related persons is limited to 20%;

(c) A foreign bank is allowed to acquire 5% or more of the shareholding in a Malaysian-owned or controlled commercial bank or merchant bank only if the following criteria are fulfilled:-

(i) the foreign bank has the ability to contribute to the

financial and economic development of Malaysia;

94 Section 4(3), LFSSA. 95 Schedule of Specific Commitments for Malaysia, Supplement 3 (Ref : GATS/SC/52/Suppl.3).



(ii) the country of origin of the foreign bank must have significant trade and investment interest in Malaysia; and

(iii) the country of origin of the foreign bank should not have

significant direct representation in the Malaysian banking industry;

(d) A commercial bank is not allowed to acquire any share in

another commercial bank, but may do so in a merchant bank and vice versa;

(e) Other persons are not allowed to acquire 5% or more of the

shareholding in a commercial bank or merchant bank if they already hold 5% or more of the shareholding in another licensed financial institution.

8.13.5 Foreign institutions are permitted to establish representative offices, but

such offices may only undertake research, exchange of information and liaison services.

8.13.6 A commitment to allow employment of two senior managers for each

commercial bank or merchant bank which has an aggregate foreign shareholding in excess of 50%.

8.13.7 A commitment to allow commercial banks and merchant banks to

employ up to 5 foreign experts in the areas of trade financing, corporate finance, treasury management and information technology.

Financial Sector Masterplan ("FSMP")

8.14 The FSMP is a blue-print prepared by BNM for the financial system for a 10-year period from 2001 to 2010. The recommendations under the FSMP include the following:- 8.14.1 To encourage greater participation by institutional investors in the

financial sector, Section 46 of BAFIA which imposes a 20% shareholding limit by a corporation and a 10% shareholding limit by an individual in a banking institution be strictly enforced and that a divestment of shares over a reasonable period of time is to be introduced to meet this objective;96

8.14.2 To uplift restrictions on employment of experts with expertise in specific areas of banking;97

8.14.3 The establishment of investment banks through mergers between merchant banks and stock broking houses or discount houses;98

96 Recommendation 3.11, FSMP.

97 Recommendation 3.5, FSMP. 98 Recommendation 3.10, FSMP.



8.14.4 To encourage rationalization of branch networks and to extend banking

facilities to rural areas which are under-served.99

As part of this initiative, foreign-owned banks operating in Malaysia are allowed to establish up to four (4) additional branches within a period of one (1) year with effect from 1 January 2006 based on a pre-determined ratio of 1 (market centre) : 2 (semi-urban) : 1 (non urban); and

8.14.5 To increase the number of Islamic banks to stimulate competition.100

In furtherance of this objective, IBA was amended in 2003 to remove the restrictions on foreign ownership or control of Islamic banks and thereafter, Islamic banking licenses were issued to 3 wholly foreign-owned Islamic banks.

8.15 A second blueprint is expected to be unveiled in the year 2011. It is meant to set the course for the development of the Malaysian financial sector from 2011 to 2020.

9) Is there a Deposits Insurance? Is it mandatory or based on self-regulations? Provide a brief explanation of how it operates. 9.1 In 2005 the Malaysian Government introduced a mandatory deposit insurance scheme for

bank deposits under the Malaysian Deposit Insurance Corporation Act 2005. The Malaysia Deposit Insurance Corporation Act 2005 has since been repealed and replaced with the Malaysia Deposit Insurance Corporation Act 2011 ("MDICA "). The scheme is administered by the Malaysia Deposit Insurance Corporation ("MDIC"), a statutory corporation established under Section 4(1)(a) of the Malaysia Deposit Insurance Corporation Act 2005. Notwithstanding the repeal of the Malaysia Deposit Insurance Corporation Act 2005, MDIC continues to be in existence and is subject to the provisions of MDICA.101

9.2 The scheme protects all deposits (other than deposits not payable in Malaysia, negotiable instruments of deposits, and other bearer deposits, repurchase agreements and money-market deposits)102 with commercial and Islamic banking institutions up to a maximum sum of RM250,000 per depositor per member institution103, namely licensed banks and finance companies under BAFIA and Islamic banks under IBA.104

9.3 The premiums are borne by the member institutions and are based on a differential-premium system.105

99 Recommendation 3.33, FSMP.

Member institutions are classified under one of four premium

100 Recommendation 5.5, FSMP. 101 Section 3(1), MDICA. 102 Refer to Section 41, MDICA for deposits that are excluded from the scheme. 103 Malaysia Deposit Insurance Corporation (Deposit Insurance Limit) Order 2011 (P.U.(A) 26/2011). 104 Sections 42(1) and (2), MDICA. 105 Refer to Malaysia Deposit Insurance Corporation (Differential Premium Systems In Respect Of Deposit-Taking Members) Regulations 2011 (P.U.(A) 34/2011).



categories by the MDIC of which the premium rates ranges from 0.03% to 0.24% per annum.106

9.4 A mandatory obligation to make payment to a depositor arises under Section 56 of the MDICA upon the winding-up of a member institution (or a transferee thereof).

9.5 MDIC is vested with powers to make discretionary payment under Section 57 of the

MDICA when all of the following conditions are fulfilled:- (a) a member institution (or its transferee) is unable to make any payment in respect

of a deposit by reason of an order of court or any action taken by a regulatory body or any action taken by a receiver and/or manager;

(b) a winding-up petition has been presented against that member institution (or a

transferee thereof); and (c) the membership of the member institution is terminated.

9.6 MDIC is conferred a discretion to make an advance payment to the depositor under Sections 56 and 57.107

10) Interest rate. Is it regulated? Should the answer be affirmative, explain briefly its regulatory framework. 10.1 On 26 April 2004, BNM introduced a new interest rate framework. Amongst the

measures implemented was the replacement of the 3-month Intervention Rate with an Overnight Policy Rate ("OPR") which serves as the primary reference rate in determining other market rates.108

The OPR is determined by BNM from time to time.

10.2 Under this new framework, each banking institution is free to determine its own Base Lending Rate ("BLR") based on its cost and business strategies.

10.3 Lending rates in certain sectors remain subject to prescription by BNM. These include

lending rates for loans granted from the Special Fund established by BNM for various purposes and target groups (which is fixed between 3.75% and 6%), housing loans to borrowers in the lower income group (which is capped at the lower of BLR+1.75% ) and interest rate for credit cards (which is capped at 18%).

10.4 Minimum rates have been prescribed for fixed deposits with tenures between 1 and 12

months for balances of RM1 million and below. These range from 2% for 1-month deposit to 2.5% for 12-months deposit.

106 First Schedule, Malaysia Deposit Insurance Corporation (Annual Premium And First Premium In Respect Of Deposit-Taking Members) Order 2011 (P.U.(A) 28/2011). 107 Section 58, MDICA. 108 Chapter 2, Bank Negara Malaysia Annual Report 2004.



11) Sanctions (civil, administrative, or criminal) for violations of the legal and regulatory dispositions. 11.1 BAFIA

Revocation of License

11.1.1 If the MOF is satisfied that a licensed institution failed to comply with any obligation imposed on it under BAFIA or has contravened any condition imposed on it under its license, he may, on the recommendation of BNM, revoke the license pursuant to Section 7.109

Imposition of Conditions in lieu of Revocation 11.1.2 If the MOF is satisfied, on the recommendation of BNM, that there are grounds

to revoke a license but circumstances are not such as to justify revocation, the MOF may, on the recommendation of BNM, impose restrictions or conditions on the license.110

11.1.3 The restrictions and conditions may include:-

(a) requiring the licensed institution to take such steps as specified by the MOF;

(b) restricting the scope of the licensed institution's business; (c) requiring the removal of any director, controller or manager.111

Regulatory powers in particular circumstances 11.1.4 If BNM is satisfied that a licensed institution has contravened any provision of

BAFIA or any condition of its license or any provision of any written law, BNM may by order in writing exercise any one or more of the following powers under Section 73112

:-

(a) require the licensed institution to take or refrain from taking any action; (b) prohibit the licensed institution from extending further credit facility; (c) remove any officer of the licensed institution; (d) appoint any person or persons as a director or directors of the licensed

institution;

109 Section 7(1)(b) and (c), BAFIA. It should be noted that the powers under Section 7 are also exercisable in the other circumstances set out in that provision. 110 Section 8(1), BAFIA. 111 Refer to Section 8(3), BAFIA for complete list of restrictions and conditions that may be imposed. 112 The powers in Section 73 are also exercisable in the other circumstances set out in that provision.



(e) appoint any person as advisor of the licensed institution.113

11.1.5 The actions to be taken by the licensed institution are set out in the order and may be subject to restrictions and conditions set out therein. The powers set out in paragraphs (b) to (d) above may be exercised only with the prior concurrence of the MOF.

Assumption of Control, Judicial Management and Winding Up

11.1.6 Where the circumstances set out in Section 73 exist, the MOF may on recommendation of BNM, issue an order that authorizes BNM to:-

(a) assume control of the whole of the business and affairs of a licensed

institution or to authorize any person to do so on behalf of BNM; (b) authorize BNM to apply to Court for appointment of a receiver or

manager to manage the whole or part of the business and affairs of a licensed institution; or

(c) present a petition to Court to wind-up the licensed institution.114

Extension of Powers 11.1.7 The powers set out in Section 73 (and ancillary provisions in Sections 69 to 81)

are exercisable in relation to a related corporation of the licensed institution concerned and to a person controlled by a director or directors of the licensed institution or by persons acting in concert with such director or directors.115

Other Offences and Penalties 11.1.8 Any person found guilty of an offence under BAFIA shall on conviction be liable

to fines or imprisonment or both as prescribed under BAFIA.116

The maximum imprisonment term ranges from 1 year to 10 years and the maximum fines from RM5,000 to RM10 million. In addition, continuing offences are liable to a maximum daily fine ranging from RM500 to RM100,000 for each day that the offence continues.

11.1.9 The offences are compoundable by the Governor of BNM with the concurrence of the MOF.117

11.2 IBA

Revocation of License

113 Section 73(1)(A) to (E), BAFIA. 114 Section 73(2), BAFIA. 115 Section 79, BAFIA. 116 Section 103 read with the Fourth Schedule and Section 104, BAFIA. 117 Section 108(1), BAFIA.



11.2.1 If an Islamic bank or international Islamic bank contravene any provisions of IBA, the MOF may, on the recommendation of BNM, revoke the licenses issued to the banks after giving the banks concerned not less than 21 days to submit reasons why the licenses should not be revoked.118

Regulatory powers in particular circumstances 11.2.2 If BNM is of the opinion, after due investigation, that an Islamic bank or

international Islamic bank has contravened or failed to comply with any provision of IBA or any condition of its license, BNM may, with the concurrence of the MOF, exercise any one or more of the following powers:-

(a) order the Islamic bank or international Islamic bank to take or refrain

from taking any action; (b) prohibit the Islamic bank or international Islamic bank from extending

further advance, loan or credit facility; (c) remove from office any of its directors or appoint any person as its

director; (d) appoint any person to advise the Islamic bank or international Islamic

bank on the proper conduct of its business; (e) assume control of the business of the Islamic bank or international

Islamic bank or appoint some other person to do so; (f) petition to the Court to wind up the Islamic bank or international Islamic

bank.119

Extension of Powers 11.2.3 The powers set out in Section 37 (and ancillary provisions in Sections 31 to 43)

are exercisable in relation to a subsidiary of an Islamic bank or international Islamic bank.120

Other Offences and Penalties 11.2.4 Any person found guilty of an offence under IBA shall on conviction be liable to

fines or imprisonment or both as prescribed under IBA. In addition, continuing offences are liable to a daily fine for each day that the offence continues.

11.2.5 The offences are compoundable by the Governor of BNM with the concurrence

of the MOF.121

118 Sections 11(1), 11(2) and 30E(1), IBA. It should be noted that the powers under Section 11 are also exercisable in the other circumstances set out in that provision.

119 Sections 37(1), 37(2) and 30E(1), IBA. It should be noted that the powers under Section 37 are also exercisable in the other circumstances set out in that provision. 120 Section 41 and 30E(1), IBA. 121 Section 51(1), IBA.



11.3 LFSSA

Revocation of License 11.3.1 The Labuan FSA may, revoke the license of any Labuan bank if the bank has

contravened any provision of its license or any provision of LFSSA.122

Other Offences and Penalties 11.3.2 Any person found guilty of an offence under Sections 87(1), 93(3) and 98(1) of

LFSSA shall on conviction be liable to a fine not exceeding RM10 million or to imprisonment not exceeding 5 years or to both. In addition, continuing offences are liable to a daily fine not exceeding RM10,000 for each day that the offence continues.

11.3.3 In respect of other offences under LFSSA, the sanction is a fine not exceeding

RM3 million in the case of a body corporate and RM1 million in the case of an individual. The maximum daily fine is RM5,000.123

11.3.4 The offences are compoundable by the Labuan FSA with the written consent of the Public Prosecutor.124

III. BANK SECRECY LAWS 12) Is clients’ information protected? Are there any restrictions for its use? 12.1 BAFIA

12.1.1 Section 97(1) prohibits a director or officer of any licensed institution, whether during his tenure of office or employment or thereafter, from disclosing to any person any information or document whatsoever relating to the affairs or account of any customer.

12.1.2 Section 96 precludes BNM from making any inquiry into the affairs of any

individual customer of any licensed institution. However, such prohibition does not prejudice BNM or any investigating officer from exercising their powers of inspection, examination, investigation and inquiry under BAFIA.

12.2 IBA

12.2.1 Section 34(3) prohibits an officer of any Islamic bank or international Islamic bank and any other person having access to the records of such bank from disclosing any information regarding the moneys or other relevant particulars of

122 Section 167, LFSSA. It should be noted that the powers under Section 167 are also exercisable in the other circumstances set out in that provision. 123 Section 187, LFSSA. 124 Section 194, LFSSA.



the customer's account except with and to the extent specified in the written consent of BNM.

12.2.2 Section 34(1) precludes BNM from inquiring specifically into the affairs of any

individual customer of any Islamic bank or international Islamic bank. 12.3 LFSSA

12.3.1 Section 178 prohibits any person who has access to any record, book, register, correspondence or other document, material or information whatsoever relating to the affairs or accounts of any customer of a licensed Labuan bank to disclose to any other person, or make a record for any person of any such record, book, register, correspondence or other document, material or information.125

13) Should answer to number 12) be affirmative, please describe the legal framework, i.e. scope, limitation, exceptions. 13.1 BAFIA

13.1.1 Section 43(2) is a specific exception to Section 96 which empowers BNM to require licensed banks, merchant banks and finance companies to submit credit information relating to their customers to a credit bureau established pursuant to the CBA. BNM is authorized under the CBA to disclose, in such manner and to such extent as it deems fit, the credit information collected by the credit bureau to other banking or financial institutions to assist the latter to assess the creditworthiness of their existing or potential customers and eligibility of a customer to maintain or open a current account with a bank. The information disclosed to an institution shall be secret.126

13.1.2 Section 97(1) of BAFIA does not apply to information which at the time of disclosure is already lawfully available to the public from any source other than the licensed institution, or to any information supplied in a summary form which does not relate to any particular customer.127

13.1.3 The obligation of secrecy is, however, not absolute and the following exceptions are permitted:-

(a) disclosure to BNM or its director, officer or employee or any person

authorized by BNM to enable the latter to discharge their functions and duties;

(b) where the customer or his personal representative has given permission

in writing to disclose; (c) where the customer has been declared bankrupt or wound up;

125 Section 178(1)(c), LFSSA. 126 Section 47, CBA. 127 Section 97(2), BAFIA.



(d) where the information is required to enable a party to assess the creditworthiness of the customer in relation to a transaction or prospective transaction to which the customer is a party, provided that the information required is of a general nature and does not enable the details of the customer's account or affairs to be ascertained;

(e) in criminal proceedings or in civil proceedings between the licensed

institution and its customer or his guarantor, or in inter-pleader proceedings involving the licensed institution in relation to money in the customer's account;

(f) where the licensed institution has been served a garnishee order attaching

monies in the account of the customer; (g) disclosure to a credit bureau established, or to an agent appointed, by a

licensed institution with the prior written consent of BNM; (h) where disclosure is required under any other provision of BAFIA or is

authorized in writing by BNM; (i) where disclosure is authorized under any Federal Law to be made to a

police officer investigating an offence specified in such law (and is limited to the account and affairs of the person suspected of the offence); and

(j) information required to be furnished pursuant to an order issued under

the Banker's Books (Evidence) Act, 1949.128

13.2 IBA

13.2.1 Exceptions to the obligation of secrecy are as follows:- (a) disclosure to BNM pursuant to the exercise of its powers of investigation

under IBA; (b) where the customer or his personal representative, has given permission

in writing to disclose; (c) where the customer has been declared bankrupt; (d) where the information is required to assess the creditworthiness of the

customer in relation to a commercial transaction or prospective commercial transaction; and

(e) information to be furnished pursuant to an order issued under the

Banker's Books (Evidence) Act, 1949.129

13.3 LFSSA 128 Sections 98 to 100, BAFIA. 129 Sections 31 to 34, IBA.



13.3.1 Exceptions to the obligation of secrecy are as follows:-

(a) disclosure lawfully required under Section 28B of the Labuan Financial

Services Authority Act 1996 or under Section 22 of the Labuan Business Activity Tax Act 1990;

(b) disclosure required under a court order made upon an ex-parte

application; (c) disclosure authorized in writing by the customer or his personal

representative; (d) information required to be furnished pursuant to an order issued under

the Banker's Books (Evidence) Act, 1949.130

14) Sanctions (civil, administrative, or criminal) for violations.

Criminal Sanction 14.1 BAFIA

A breach of the secrecy obligations under Sections 97 and 99 is a criminal offence punishable with a fine not exceeding RM3 million or a term of imprisonment not exceeding 3 years or both.131

14.2 IBA

A breach of the secrecy obligations under Section 34 is a criminal offence punishable with a fine not exceeding RM40,000 or a term of imprisonment not exceeding 3 years or both.132

14.3 LFSSA

A breach of the secrecy obligations under Section 178 is a criminal offence punishable with a fine not exceeding RM1 million or a term of imprisonment not exceeding 3 years or both.133

Civil Sanction

14.4 BAFIA, IBA and LFSSA

130 Sections 178(2) to (6), LFSSA. 131 Serial Nos.126 to 129, Fourth Schedule, BAFIA. 132 Section 34(5), IBA. 133 Section 178(7), LFSSA.



A party who is aggrieved by a breach of the secrecy obligations may also attempt to seek damages in civil proceedings and to obtain an injunction against further disclosure of the information.

Bank Finance and Regulation Survey MALAYSIA Skrine

Documents