Malaysian Financial System
TABLE OF CONTENT CONTENT 1.0 INTRODUCTION 2.0 BACKGROUND 3.0
OBJETIVES 4.0 FUNCTIONS OF THE FINANCIAL SYSTEM 5.0 STRUCTURE OF
MALAYSIAN FINANCIAL SYSTEM 5.1 Financial Institutions 5.2 Financial
Market 6.0 CONCLUSION 7.0 BIBLIOGRAPHY PAGE 2 3 4 5 8 9 12 14
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Monetary Economics (ECO 553)
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Malaysian Financial System
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INTRODUCTIONAccording to Ibrahim Abdul Rahman, financial system
is a well-organized structure
that is monitored closely by a supervisory authority to ensure
rules and regulations are adhered to by the financial market
participants in the financial system. In Malaysia, financial system
is divided into two categories, which are financial institutions
and financial market. Financial institutions comprise of banking
system and non-bank financial intermediaries. Other than that,
financial market comprise four major market which are money and
foreign exchange market, capital market, derivatives market, and
offshore market. It also comprises the set of institutions, markets
and relationships that is involved in borrowing and lending funds
and that affects the volume and cost of credit. Furthermore,
financial system includes commercial banks, savings, and loan
institutions, life insurance companies, the stock and bond markets,
investment bankers, and many other institutions and markets in the
private sector. Financial system channels household savings to the
corporate sector and allocate investment funds among firms. They
allow smoothing transactions of consumption by household and
expenditures by firms and also enable households and firms to share
risks. Different countries have different financial systems.
Besides, an optimal financial system relies on both financial
markets and financial intermediaries.
Monetary Economics (ECO 553)
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Malaysian Financial System
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BACKGROUNDThe financial system in Malaysia was first started in
year 1859 when the first
commercial bank in Malaysia, a branch of a British exchange bank
which is The Chartered Mercantile Bank of India, London and China
was established in Penang. Malaysian financial system has gone
through evolutionary cycle since then until now. Bank Negara
Malaysia was established as the central bank of Malaysia. They
introduced our currency, Ringgit Malaysia. Bank Negara Malaysia
also ensures that all the members in the financial system follow
all the rules and regulations stated. This is to maintain a good
and stable financial system. Our banking sectors are also expanding
especially Islamic banking sectors. Many new banking products and
services have been introduced. This has attracts not only Muslim
customers but also non-Muslim customers. Today, Malaysian financial
system has emerged as one of the renowned financial markets in the
region as well as in the world.
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Malaysian Financial System
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OBJECTIVES
The objectives of studying the functions of financial system and
the structure of financial system in Malaysia are as follows: 1) To
learn how financial systems what is financial systems and how does
it works in the economy. 2) To explain why is it important to
individuals and to Malaysian economy as a whole. 3) To identify
what are the important components in the financial systems.
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Malaysian Financial System
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FUNCTIONS OF THE FINANCIAL SYSTEM
Basically, the function of the financial system is to transfer
loanable funds from lenders or the surplus units to borrowers or
the deficit units. Financial system brings together individuals and
institutions providing supply of funds with the demanding funds. It
facilitates the channelization of the savings of individuals for
example, to various borrowers which are companies where they use
the funds to increase the production of goods and services which
will then improves the growth of the economy. We can say that the
financial system controls the flow of funds. The figure below
further illustrates the above function of financial system:
Loanable funds (credit)
Loanable funds (credit)
Ultimate lenders of funds (surplus units)
Financial intermediaries & other financial institutions
Ultimate borrowers of funds (deficit units)
THE FINANCIAL SYSTEM
There are two modes of transferring funds between savers/lenders
and borrowers. There are direct transfer and indirect transfer.
Direct transfer is where the savers/lenders transfer the funds to
the borrowers directly. For example, a household buys a corporate
bond from a corporation. The household is lending directly to the
corporation. Indirect transfer is where the transfer of funds from
the savers/lenders to the borrowers is done through a financial
intermediary (indirectly). For example, a household puts
money/funds into a savings account of a commercial bank. Then, the
bank may lend the funds to borrowers. We can see here that the
funds are not directly transferred from the savers and the
borrowers but through an intermediary which is the commercial bank.
Figure below illustrates the flow of transfer of funds of both
modes:
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Malaysian Financial System
DIRECT FINANCE LENDERS/SAVERS Household Firms Government
Non-residents Funds FINANCIAL MARKET Money Market Capital
MarketBORROWERS /SPENDERS
Funds
Firms Government Household Non-residents
Funds Funds FINANCIAL INTERMEDIARIES Credit Institutions Other
monetary financial institutions Other INDIRECT FINANCE Funds
1) CREDIT The financial system supplies credit for people to
support their purchases of goods and services or to finance capital
investment. This allows individuals who have insufficient funds to
buy cars or houses for example, to buy their dream cars or houses
in credit (personal loans) and pay the loan back in instalment.
Same goes to corporations which are in needs of funds to finance
their projects. While with investment, the productivity of a
countrys resources increases and also increases the standard of
living for the citizens.
2) PAYMENTS The financial system provides a mechanism for making
payments for everyone. We can make payments in the form of
currency/fiat money, checking accounts, and other transaction
media. We can also make payment whenever and wherever we want with
the help of checks, credit card and debit card. Without the
financial system today, Monetary Economics (ECO 553) 6
Malaysian Financial System one still has to take cash wherever
he or she goes which would have been impossible. We are moving away
from payments made in paper toward a system where funds are moved
via computer hook up. 3) MONEY CREATION The financial system makes
it possible for money creation. This is through the credit
facilities and the mechanism for making payments. Money serves as a
medium of exchange in purchasing goods and services. It eliminates
the inconvenience of barter system. 4) SAVINGS The financial system
provides a place for savings. Individuals and corporations save
money today so that they can consume more goods and services in
future. Savers lend their savings/surplus funds to borrowers and in
return they will gain return in from of interest, dividends,
capital gains, and so forth. The financial system usually offers
high interest rates to encourage savers to save more money and
consume less when the demands from borrowers (deficit units) are
high.
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Malaysian Financial System
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STRUCTURE OF MALAYSIAN FINANCIAL SYSTEMMalaysian financial
system can be divided into two. There are financial
institutions
and financial market. The diagram below further illustrates the
structure of Malaysian Financial system.
Financial System
Financial Institutions
Financial Market
BANKING SYSTEM 1.Bank Negara Malaysia 2.Banking Institutions
Commercial Banks Investment Banks Islamic Banks 3. Others Discount
Houses Representati ve Offices of Foreign Banks
NON-BANK FINANCIAL INERMEDIARIES 1. Provident and Pension Funds
2. Insurance Companies 3. Development Finance Institutions 4.
Savings Institutions National Savings Bank Co-operative Societies
5. Others Unit Trusts Pilgrims Fund Board Housing Credit
Institutions Cagamas Berhad Credit Guarantee Corporation Leasing
Companies Factoring Companies
MONEY & FOREIGN EXCHANGE MARKET 1. Money market 2. Foreign
exchange market
CAPITAL MARKET 1. Equity market 2. Bond market -public debt
securitites -private debt securitites
DERIVATIVE S MARKET 1. Commodity futures 2. KLSE CI Futures 3.
KLIBOR Futures
OFFSHORE MARKET Labuan International Offshore FInancial Center
(IOFC)
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Malaysian Financial System
5.1
FINANCIAL INSTITUTIONSFinancial institution is a business firm
where their assets are stock, bond and loans
instead of real assets such as building, raw material and
equipment. Financial institution also provides loans to customer
and purchase investment services. It can be divided into 2 major
categories which is banking system and non-bank financial
intermediaries.
5.1.1
BANKING SYSTEM Malaysian banking system consists of Bank Negara
Malaysia, banking institutions,
and non-banking institutions.
1)
BANK NEGARA MALAYSIA (BNM) Bank Negara Malaysia is established
on 26 January 1959. BNM is the central bank for
Malaysia. It is regulated by Central Bank Ordinance (CBO) 1958.
The objectives and functions of the central bank are as follows: 2)
To issue currency and to keep reserves safeguarding the value of
that currency To act as a banker and financial adviser to the
government To promote monetary stability and a sound financial
structure To influence the credit situation to the advantage of the
country
BANKING INSTITUTIONS Malaysian banking institutions consist of
commercial banks, Islamic banks, and
investment banks.
a) COMMERCIAL BANKS Commercial banks are the largest and most
important group of financial institutions in Malaysia. According to
Banking and Financial Institutions Act 1989 (BAFIA), commercial
bank is an institution that does the business banking which is the
business of receiving deposits, paying or collecting cheques,
provision of finance and such other business. Commercial banks
offer many products to customers such as savings account, current
account, loans activities. They also act as intermediaries from the
surplus unit to deficit unit. Monetary Economics (ECO 553) 9
Malaysian Financial System b) ISLAMIC BANKS Islamic banks
conduct banking business which similar to other commercial banks
but they follow the principal of Shariah. They offer Islamic
banking products and services which can be used by not only Muslim
but also the non-Muslim
c) INVESTMENT BANKS Investment banks provide services such as
providing advisory services and management services to
corporations. Some of the activities that they do are loan
syndication, underwriting services, and portfolio management. They
also involve in venture capital financing.
3)
OTHERS DISCOUNT HOUSES Discount houses in Malaysia began it
operation in 1963. In 1989, discount houses came under BAFIA.
Discount houses are only group that allowed money at call. Discount
houses specialize in short-term money market operation and mobilize
deposits from financial institutions and corporations. Discount
houses were appointed to be sole principle dealer for TB.
5.1.2
NON-BANK FINANCIAL INTERMEDIARIES Basically, Malaysian Non-bank
Financial intermediaries are mainly comprise of
Provident and pension funds, insurance companies, development
finance institutions, and savings institutions.
1) PROVIDENT AND PENSION FUNDS Provident and pension funds are
groups of financial schemes designed to provide members and their
dependents with a measure of social security in the form of
retirement, medical, death, or disability benefits. Each worker in
Malaysia is compulsory to have this account. There are 2 accounts.
Each account can be withdrawn in line with their purpose. Monetary
Economics (ECO 553) 10
Malaysian Financial System 2) INSURANCE COMPANIES There is 4
types of insurance in Malaysia which is life, general, professional
and export credit re-insurance. All types of insurance have the
same purpose which is to protect the holder of the insurance from
many aspect which their cover to. Insurance also provide saving to
the holder in terms of saving for child education or contingency
fund.
3) DEVELOPMENT FINANCE INSTITUTIONS Development finance
institutions are established by government to promote investment in
manufacturing and agriculture sector. These institutions are
specialized in middle and long term financing. Some of main
development finance institutions in Malaysia are: Bank Pertanian
Malaysia Bank Industri & Teknologi Malaysia Bank Pembangunan
& Infrastruktur Malaysia Berhad
4) SAVING INSTITUTIONS Main purpose of saving institutions in
Malaysia is to promote and mobilise saving to the middle and lower
income group and especially people in rural area. Saving
institution consists of national saving bank which is Bank Simpanan
Nasional and cooperative societies.
5) OTHER NON-BANK FINANCIAL INTERMEDIARIES It acts as
intermediaries which connect people who have surplus (lenders) and
people who deficit (borrowers). It consists of unit trust, pilgrims
fund board, housing credit institutions, Cagamas Berhad, credit
guarantee corporation, leasing companies, factoring companies and
venture capital companies. They will invest the funds that they
receive from the surplus units to generate profit.
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Malaysian Financial System
5.2
FINANCIAL MARKET
The Financial System in Malaysia is divided into two portions
which is financial institutions and financial market. The financial
market is below divided into four markets which depend on their own
functions and objectives. There are Money and Foreign Exchange
Markets, Capital Markets, Derivatives Markets, and Offshore
Market.
1)
MONEY AND FOREIGN EXCHANGE MARKET
Money market is a market that provides a short-term utilization
of funds among market participants which is Central bank, banking
institutions, non-bank institutions such as Pension funds and Unit
trust, corporations, and money brokers. It is a place where lenders
and borrowers of funds meets and perform their transactions to
fulfil their short-term fund desires. Basically, it is also known
as financial instruments trading market for surplus and the deficit
units in the financial system.
Foreign Exchange market is a necessary market for corporations
to complete their international transactions. All corporations that
doing import and export business is need to purchase the required
currencies for them to effect payment or to convert the currencies
received from the other country to a local currency. The
participants of foreign exchange market include of commercial
banks, Central bank, corporations, non-bank financial institutions,
and money broker.
2)
CAPITAL MARKET
The capital market which comprised of the equity and the bond
market focus more on long-term investment or instruments. Equity
market provides the facility of rising of funds to corporations by
issuing stocks and shares and also the trading of shares in the
secondary markets. The bond market on the other hand, is another
alternative place where private and public sector can raise funds
by issuing private and government debt securities.
Monetary Economics (ECO 553)
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Malaysian Financial System 3) DERIVATIVES MARKET
The derivatives market provides a possibility where domestic and
international market participants can manage their risk exposures
in an efficient and cost effective method. Derivatives are
financial instruments used to manage ones exposure in todays
volatile market. A derivative products value depends upon and is
derived from an underlying instrument, such as commodity prices,
exchange rates, interest rates, indices and share prices. 4)
OFFSHORE MARKET
The offshore market is a market where assets are moved actively
by market participants who are in surplus and deficit units in an
offshore financial centre having specific and unique features. It
is a market whereby offshore companies offered a financial products
and services that meet the needs of financial market participants
in a low tax system. Offshore market in Malaysia is located in
Labuan with the establishment of Labuan Offshore Financial Services
Authority (LOFSA) in 1996.
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Malaysian Financial System
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CONCLUSIONAs a conclusion, financial system plays a very
important role in the economy. Recent
years have seen that financial system that has outgrown in size,
lost track of its core functions, and became a major source of risk
itself. It is important for a country to have a sound and stable
financial system in order to support the economy. Overall, a good
financial system brings many advantages to the country where it
helps to expand the flow of the economy. A financial system also
can affect the financial development with a strong regulation of
international capital movements.
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Malaysian Financial System
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BIBLIOGRAPHY
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Money, Eleventh Edition. John Wiley & Sons. Rahman, I. A.
(2011). Financial Markets and Institutions. Othman, J. (2009).
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(2007). Financial markets and institutions (5th edition). Pearson
Education Limited. Iqbal, Z. (2007). An Introduction to Islamic
Finance : Theory and Practice. John Wiley & Sons (Asia) Pte
Ltd. Rose, P. S. (1988). Financial Institution (3rd edition).
Business Publications, Inc. Jones, F. J. (1978). Macro Finance :
The Financial System and the Economy. Winthrop Publishers, Inc.
Money and Banking in Malaysia. (1979). The Economic Research and
Statistic Department. Allen, F. (n.d.). Comparing Financial
Systems. Retrieved from
http://ideas.repec.org/b/mtp/titles/0262511258.html Financial
System of Malaysia. (n.d.). Retrieved from
http://www.kpmg.com.my/kpmg/publications/tax/I_M/Chapter5.pdf Lets
Learn Finance. (n.d.). Retrieved from
http://www.letslearnfinance.com/functions-offinancial-system.html
The Malaysian Financial System. (n.d.). Retrieved from
http://www.ibbm.org.my/v2/wpcontent/uploads/2011/05/Chap-1-amended-010305_2305t060205.pdf
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