FINANCIAL STRUCTURE

P2112/1/1

UNIT 1

FINANCIAL STRUCTURE

OBJECTIVES

General Objective Specific Objectives

: To understand the structure of financial system in Malaysia.

At the end of the unit you will be able to : explain the evolution, function, role and structure of the financial system in Malaysia which consist of banking system, non-bank financial intermediaries and financial market. explain the role and function of financial institution and financial intermediaries in the countrys development. explain the assets, sources and uses of fund and steps taken to develop the system. explain in details about the flow of funds and the direction of credits. explain in details about the latest monetary policies.

FINANCIAL STRUCTURE

P2112/1/2

explain the acts that regulate financial institution BAFIA 1989, the Offshore Banking Act 1990 and Islamic Banking Act 1983. explain the role and purpose of regulatory body in Malaysian financial system. explain the characteristics, roles and objectives of International Offshore Financial Centre (IOFC). discuss the factors that contribute to the successful operation of the International Offshore Financial Centres (IOFC). describe the financial services which is offered by International Offshore Financial Centre (IOFC). Discuss the incentives given to the participants who operate in Labuan. identify the challenges faced by the financial sector in the global economy.

FINANCIAL STRUCTURE

P2112/1/3

INPUT

1.0 EVOLUTION, ROLES AND STRUCTURE OF THE FINANCIAL SYSTEM In this chapter, we will discuss about the Malaysian financial structure. Let us begin with the: EVOLUTION OF THE FINANCIAL SYSTEM The development of a sound and financial system is a necessary pre-condition for a stable and balanced economic and social development in Malaysia. In this regard, Bank Negara Malaysia (BNM) has consciously and systematically developed a modern and sophisticated financial system. The financial system has effectively mobilized and allocated resources for productive use in tandem with the rapid transformation of the economy. The development can be divided into four phases: First phase. The first priority of BNM in the early 1960s was to create the basic infrastructure for the financial system. It is also to develop a truly Malaysian-oriented banking system to complement the presence of strong foreign banking in the economy. Therefore, early efforts were focused on institutional building in order to develop an extensive domestic banking network and re-orientate the operations foreign banks branches to domestic needs. Second phase In the 1970s, BNMs efforts were focused on introducing other financial intermediaries. The establishment of merchant banks, the first of which was set up in 1970, satisfied the growing need for financial expertise in wholesale banking and corporate financing. This is caused by the expansion of the public and private

FINANCIAL STRUCTURE

P2112/1/4

enterprises which progressed towards more technology-oriented activities, involving more complicated forms of financing. In addition, BNM was also instrumental in establishing a number of development finance institutions and the Credit Guarantee Corporation to ensure a better position for the financial system to serve the financing needs of a more diversified economy. Another significant development during the decade was the enactment of a new legislation, the Banking Act 1973, to strengthen the regulation and supervision of banking institutions. Third phase In the 1980s, BNMs efforts were focused on further strengthening the regulatory and supervisory framework for the banking system. The latter part of the 1980s was a period of prudential re-regulation and significant structural changes in the banking system. These changes were comprehensive and prompted by lessons from domestic development as well as the global recession in the early 1980s. As a result, the Malaysian banking system was strengthened considerably, and was able to remain sound and intact despite the severe consequences of the sharp recession following the Asian financial crisis. Fourth phase The 1990s was characterized by rapid changes shaped by the forces of liberalization and globalization, aided by technology which broke new frontiers in the functioning of financial markets and in the development of financial products. The Asian crisis was a catharsis that catalyzed national and international efforts to strengthen domestic financial system and the financial architecture. These issues will remain on the Malaysian agenda in the years ahead, including an acceleration of on-going efforts to consolidate the banking industry and to inject greater dynamism and competition into the system.

FINANCIAL STRUCTURE

P2112/1/5

ROLES OF THE FINANCIAL SYSTEM Banking System

The banking system consists of BNM, the banking institutions and other financial institutions, namely the discount houses, the representative offices of foreign banks and offshore banks in the International Offshore Financial Centre in Labuan (Labuan IOFC). BNM, as the central bank, is at the apex of the banking system, and is responsible for the regulation and supervision of the banking system, with the exception of the offshore banks operating in the Labuan IOFC which comes under purview of the Labuan Offshore Financial Services Authority (LOFSA). The commercial banks are the main players in the banking system. They are the largest and most significant providers of funds in the banking system. The range of transaction accounts typically offered are savings account, current account, fixed deposits and negotiable instruments of deposits (NIDs). They provide facilities for making payments or monetary transfers in domestic or foreign currencies, both locally and internationally; makes commercial and industrial loans and trade finance. Finance companies form the second largest group of deposit-taking institutions in Malaysia. They provide finance (credit) , e.g. to operate hire purchase transactions on behalf of retailers of consumer goods such as cars and electronic and electrical equipment. Merchant banks filled the need for large corporations which require bulky financing and complex banking services, by complementing the facilities offered by commercial banks which are more focused on providing shortterm credit for working capital and trade financing. They also play a role in the short-term money market and capital raising activities. Discount houses specialized in short-term money market operations and mobilize deposits from the financial institutions and corporations in the form of money at call, overnight money and short-term deposits. The funds mobilized are invested in The Malaysian Treasury bills (TB), Malaysian

FINANCIAL STRUCTURE

P2112/1/6

Government Securities (MGS), bankers acceptances (BA), negotiable instrument of deposit (NID) and Cagamas bonds. -

Non-bank financial intermediaries

These institutions are generally under the supervision of various government departments and agencies. All of them deal with funds. They mobilize funds from certain sources and channel them to the deficit units. Like their sources, the uses of these funds varies.

Development finance institutions help to promote the development of certain economic sectors through long-term investment financing. On the other hand, provident and pension funds is designed to meet contingent financial needs of their clients and further assist the public sectors development efforts by subscribing to government securities. Finally, saving institutions are important to the small-time savers ant the rural population who usually have less opportunities to utilize existing banking facilities.

Financial Market The financial market in Malaysia comprise the money and foreign exchange market, the capital markets, the derivatives markets and offshore markets.

The money market is an avenue for the channeling of short-term funds with maturities typically not exceeding 12-month. It provides a ready source of funds for market participants facing temporary shortfalls in funding, while at the same time, providing short-term investment outlets for those with temporary surplus funds.

Unlike the money market, capital markets are markets for raising long-term funds containing the equity and bond markets.

The derivatives markets are for trading instruments that provide contingent claims on underlying assets, and whose values depend on the price of the underlying assets or securities.

FINANCIAL STRUCTURE

P2112/1/7

The Labuan IOFC is aimed at enhancing the attractiveness of Malaysia as a regional financial centre, as well as to promote the economic development of Labuan and its vicinity.

STRUCTURE OF THE FINANCIAL SYSTEM The structure of Malaysian Financial System is presented in Figure 1.1. FINANCIAL INSTITUTIONS
Banking System Bank Negara Malaysia Banking Institutions - Commercial Banks1 - Finance Companies - Merchant Banks Others - Discount Houses - Representative Offices of Foreign Banks - Offshore Banks in Labuan IOFC Non-Bank Financial Intermediaries Provident and Pension Funds Insurance Companies2 Development Finance Institutions Savings Institutions - National Savings Bank - Co-operative societies Other Non-Bank Financial Intermediaries - Unit Trusts - Pilgrims Fund Board - Housing Credit Institutions - Cagamas Berhad - Credit Guarantee Corporation - Leasing Companies - Factoring Companies - Venture Capital Companies
1 2

FINANCIAL MARKETS
Money & Foreign Exchange Markets Money Market Foreign Exchange Market

Capital Market Equity Market Bond Market - Public Debt Securities - Private Debt Securities

Derivatives Market Commodity Futures KLSE CI Futures KLIBOR Futures

Offshore Market Labuan International Offshore FinancialCentre (IOFC)

Including Islamic banks Including Takaful

Figure 1.1 Financial System

( Source: The Central Bank and the Financial System in Malaysia A Decade of Change; BNM 1999)

FINANCIAL STRUCTURE

P2112/1/8

1.1

ROLES OF FINANCIAL INSTITUTIONS AND FINANCIAL INTERMEDIARIES IN THE DEVELOPMENT OF COUNTRY.

1) Intermediation function The financial system, comprising both financial institutions and markets, acts as an intermediary of resources in the economy. This intermediation function involves the mobilization of resources by providing the means for savers to hold monetary and financial assets, and allocating these resources for productive investment. An efficient financial intermediation system helps channel resources efficiently towards activities with high rate of return, as well as allow implementation of projects that are larger in scale, and with longer gestation period and riskier prospects. In addition, efficiency also means that information is processed well, allowing investment opportunities to be identified so that resources can be channeled to these activities.

2) Operation of the payment system A payment system essentially refers to a network of services that facilitates transactions involving the exchange a means of payment in return for goods, services, real assets and financial assets. The means of payment can take on many forms such as currency, cheques and credit cards, as well as modern electronics means such as stored-value cards. The instruments, institutions and services that facilitate the transfer of value to discharge the payment obligation, serve as the payment system architecture. Therefore the payment system is a central element in the economic infrastructure that facilitates the efficient clearing and settlement process. Therefore, it has a significant effect on the operating efficiency of an economy. As key players in the payment system, strong and efficient financial institutions are essential for the efficient functioning of the payment system.

FINANCIAL STRUCTURE

P2112/1/9

3) As a channel for transmission of monetary policy In addition to its contribution to the development of the economy, a wellfunctioning and efficient financial system is vital for the effective conduct of monetary policy. This is because monetary policy is transmitted primarily through the banking system. On the other hand, an inefficient banking system, usually characterized by financially weak banking institutions and inefficient market mechanisms may render monetary policy less effectively in achieving its objectives. In an environment of emerging inflationary pressure, the ability of a central bank to raise interest rates would be constrained if the financial institutions are weak. This is because higher interest rates would weaken the health of the corporate sector and lead to the deterioration in the asset quality of the banking institutions.

FINANCIAL STRUCTURE

P2112/1/10

1.2

ASSETS, SOURCES AND USES OF FUND AND STEPS TAKEN TO DEVELOP THE SYSTEM. ASSETS OF THE FINANCIAL SYSTEM Assets of the financial system are presented in Table 1.1.
Growth (% per annum) 1988 1988 1997 1998 1998 (Avg.) (Avg.) Outstanding (end-period) RM billion As % of financial system 1987 1998 69.5 12.0 56.1 42.4 10.5 3.1 1.5 30.5 18.2 3.2 2.4 2.7 4.1 100.0 70.1 11.4 56.9 42.0 11.3 3.6 1.8 29.9 15.9 3.6 1.8 1.6 6.9 100.0

1987 Banking system1 Bank Negara Malaysia Banking Institutions Commercial banks2 Finance companies Merchant banks Discount Houses Non-bank Financial Intermediaries Provident and Pensions Funds Insurance funds Development Finance Institutions Saving Institutions Other Non-bank Financial Intermediaries Total Assets
1 2

1998 766.7 124.7 622.0 459.2 123.6 39.2 20.2 326.6 174.0 39.3 19.8 18.0 75.5 1,093.3

19.2 16.2 19.7 18.9 21.8 21.5 21.4 17.2 15.4 18.6 12.5 13.3 25.0 18.6

-5.6 14.5 -8.8 -5.4 -18.9 -11.4 -4.6 8.5 12.6 11.1 28.0 -4.2 -1.6 -1.8

16.7 16.1 16.7 16.5 17.3 18.0 18.8 16.4 15.2 17.9 13.8 11.6 22.3 16.6

140.6 24.2 113.4 85.8 21.3 6.3 3.0 61.6 36.8 6.4 4.8 5.4 8.3 202.2

Excludes Offshore Banks in Labuan IOFC Includes Bank Islam Malaysia Berhad

Table 1.1 Assets of the financial system

(Source: The Central Bank and the Financial System in Malaysia A Decade of Change; BNM 1999)

FINANCIAL STRUCTURE

P2112/1/11

SOURCES AND USES OF FUNDS Table 1.2 summarizes the structure of the sources and uses of funds of the financial system in selected years of the period.
1988 RM million Sources of funds: Capital, reserve & profit Currency Demand deposits Other deposits1 (of which): Public sector Other financial institutions2 Private sector Foreign Borrowings Funds from other financial institutions Domestic2 Foreign Insurance, provident & pension funds Other liabilities Total liabilities Uses of funds: Currency Deposits with other financial institutions Domestic Foreign Bills Treasury Commercial Loans & advances Public sector Other financial institutions Private sector Foreign Securities Malaysian government Foreign Corporate Others Gold & foreign exchange reserves 17,866 9,037 11,387 93,347 25,130 18,615 49,328 274 5,612 12,208 7,567 4,641 47,438 32,913 229,808 1993 RM million 41,936 14,649 33,450 198,015 28,351 38,868 127,237 3,558 5,768 56,403 27,014 29,389 99,653 119,460 569,335 1998 RM million 102,445 20,547 65,111 457,954 40,393 103,870 305,699 7,993 14,400 66,074 39,600 26,474 189,791 176,998 1,093,321

% 7.8 3.9 5.0 40.6 10.9 8.1 21.5 0.1 2.4 5.3 3.3 2.0 20.6 14.3 100.0

% 7.4 2.6 5.9 34.8 5.0 6.8 22.3 0.6 1.0 9.9 4.7 5.2 17.5 21.0 100.0

% 9.4 1.9 6.0 41.9 3.7 9.5 28.0 0.7 1.3 6.0 3.6 2.4 17.4 16.2 100.0

905 33,479 28,418 5,061 5,962 4,472 1,490 93,084 2,242 2,264 87,562 1,016 62,717 51,349 2 11,366 0 17,271

0.4 14.6 12.4 2.2 2.6 1.9 0.6 40.5 1.0 1.0 38.1 0.4 27.3 22.3 0.0 4.9 0.0 7.5

1,597 115,827 108,768 7,060 7,825 2,737 5,088 209,802 2,860 3,767 201,787 1,388 105,245 61,047 69 41,703 2,427 75,309

0.3 20.3 19.1 1.2 1.4 0.5 0.9 36.9 0.5 0.7 35.4 0.2 18.5 10.7 0.0 7.3 0.4 13.2

3,224 151,578 136,138 15,440 14,648 3,796 10,852 485,712 5,567 28,995 448,318 2,832 225,569 71,575 1,269 141,781 10,944 96,265

0.3 13.9 12.5 1.4 1.3 0.3 1.0 44.4 0.5 2.7 41.0 0.3 20.6 6.5 0.1 13.0 1.0 8.8

FINANCIAL STRUCTURE

P2112/1/12

Other assets Total Assets

1 2

16,390 229,808

7.1 100.0

53,729 569,335

9.4 100.0

116,324 1,093,321

106 100.0

Equal savings, fixed and other (NIF,LPHT, etc) deposits + NIDs + repos Effective 1998, the statutory reserves of the banking institutions have been reclassified as Funds from other financial institutions rather than Other deposits from other financial institutions. In this regard, data for prior years have also been revised accordingly.

Table 1.2 Sources and uses of funds of the financial system

(Source: The Central Bank and the Financial System in Malaysia A Decade of Change; BNM 1999)

STEPS TAKEN TO DEVELOP THE SYSTEM The development of Malaysias financial system has evolved over several decades against the backdrop of rapid changes in the economy and the international financial environment. This development has been significantly shaped by BNM, and the approach of BNM in this regard has been pragmatic and flexible. Consequently, policies have been modified according to the changing circumstances, to achieve the objective of financial sector development, that is, to develop an efficient and sophisticated financial system that can support balanced economic development. The steps taken are as discussed below: 1. Leveling the playing field Several measures were introduced during the period of 1989-99 to level the playing field to allow commercial banks, finance companies and merchant banks to compete on equal ground with each other. These include the adoption of a standard ratio for the statutory reserve requirement (SRR), as well as the introduction of the risk-weighted asset approach as the uniform method of capital adequacy assessment for the three groups of banking institutions. The harmonization of standards was aimed at enhancing competition among the three groups of banking institutions, which were essentially engaged in the same type of business.

FINANCIAL STRUCTURE

P2112/1/13

2. Interest rate reforms In line with the objective to develop a more market-driven financial system, the process of interest rate reforms resumed, following its abandonment during the period of tight liquidity from 1985-87.The pegged deposit rate arrangement was dismantled in 1987. Meanwhile, with effect from 1st February 1991, the base lending rate (BLR) of the banking institutions was completely freed from administrative control, with banking institutions allow to charge a maximum of 4 percentage points above their declared BLR. With the freeing of the BLR, both the deposit and lending rates were expected to be determined competitively by the banking institutions, taking market forces into consideration. There was, however, a long transmission lag for policy (approximately 2-3 months). To reduce this lag, a new BLR framework was introduced in November 1995, whereby the BLR was linked to the weighted monthly average of the 3-month BNM interbank rate. In 1998, the BLR was linked to the 3-month BNM intervention rate instead of the 3month interbank rate. This has reduced the transmission lag to within one week. In addition, the maximum margin over the quoted BLR was also reduced from 4 percentage points to 2.5 percentage points.

3. Institutional development - International Offshore Financial Centre (IOFC) was established on 1st October 1990 in Labuan, in order to enhance the attractiveness of Malaysia as a regional financial centre, increase the contribution of the financial services sector to the nations GDP and promote the economic development of Labuan and its vicinity. The IOFC conducts a variety of international banking, insurance and investment activities. - As part of the institutional building to develop the capital markets, BNM initiated the establishment of the Securities Commission (SC) on 1 March 1993. A separate institution is necessary to consolidate the regulation and supervision of the capital markets as well as oversee future measures to broaden and deepen the markets. In

FINANCIAL STRUCTURE

P2112/1/14

addition, it is also recognized that there is a need to further develop the capital markets as an alternative source of funding primarily for the private sectors. - BNM also developed the private debt securities market and the Rating Agency Malaysia Berhad (RAM) to rate debt issues by corporations. - To further develop Kuala Lumpur as a key financial centre, the decade also saw initiatives being taken to promote trading in options and financial futures. On 15th December 1995, with the launching of KLOFFEs stock index futures contract, Malaysia becomes the fourth Asian country after Singapore, Hong Kong and Japan to offer domestic equity derivatives product. Another milestone during the decade was the commencement of trading on the Malaysian Exchange of Securities Dealing & Automated Quotation Bhd. (MESDAQ), a stock exchange targeted specifically at growth and technology companies, on 30 April 1999. - In the banking system, the launching of the interest-free banking scheme in March 1993 provided the foundation for developing a viable and comprehensive Islamic banking system.

4. Consolidation and restructuring of the financial system The consolidation of the banking institutions over the past decade, in essence, begin with efforts by BNM to restructure the banking system following the banking crisis in the mid1980s. While the banking sector entered the financial crisis in 1997 from a position of strength, the severity of the crisis weakened the health of the banking sector, as reflected in the deterioration in capitalization and asset quality. Following these developments and anticipation of further adverse implications of the crisis on the banking system, BNM adopted a pre-emptive and comprehensive four-pronged plan to restructure the financial system. This involved a strategy to consolidate the finance company industry, and establishing Danaharta, Danamodal and Corporate Debt Restructuring Committee to deal with the emerging problems of deteriorating asset quality and capitalization, as well as corporate debts, respectively.

FINANCIAL STRUCTURE

P2112/1/15

Nonetheless, the crisis exposed the vulnerability of small banking institutions and the need for these institutions to maintain a high level of capital. In this regard, it has always been on the agenda to encourage banking institutions to merge in order to achieve economies of scale and higher level of efficiency. This move is aimed at strengthening the capacity, capability and ability of domestic banking institutions to meet the challenges arising from an increasingly competitive global environment.

5. Payment system The design and development of effective and efficient payment systems have been an integral part of BNMs initiative to further enhance the operations of the financial system. The forces of financial globalization and rapid technological advancements have also provided the impetus for the promotion for payment mechanism that are inexpensive, secure, reliable and efficient. Towards this, BNM launched the payment system masterplan in 1996 to chart the development and implementation of payment system in Malaysia. The masterplan was formulated along the lines of the four major modes of payment instruments, namely, cash, cheques, card-based payment instruments and electronic-based payment mechanism.

6. Prudential and regulatory reforms In Malaysia, the regulatory and supervisory framework of the banking system has been continually reviewed since the early 1980s in order to ensure that it remains relevant in the light of structural changes in the domestic economy and external environment. This review led to the introduction of the Banking and Financial Institution Act 1989 (BAFIA) in October 1989. BAFIA provides a framework for an integrated supervision of the Malaysian financial system and enhances the powers and duties of the auditors of licensed institutions and made a director, officer or controller of a licensed institution liable to indemnify the institution in full for any loss or damage in any form arising from or caused by on offence committed by any person.

FINANCIAL STRUCTURE

P2112/1/16

Another major related development was the transfer of regulation and supervision of the insurance industry to BNM with effect from 1st May 1988. The main rationale behind the relocation was to streamline and adopt an integrated approach to the supervision of the entire financial system in the country and to realize economies of scale in regulation and supervision.

On its part, BNM has also reviewed its supervisory approach by focusing on areas of high risk that have adverse implications on the soundness of the banking institutions. In this regard, BNM has adopted risk-based supervision which emphasizes a combination of dynamic off-site surveillance and on-site examination.

7. Liberalization of the financial sector Malaysia recognizes that the opening up of the domestic financial sector to foreign competition would contribute towards a more efficient, competitive and market-driven financial sector, thus enabling the sector to play a more efficient and effective role in the economy. At the same time, it is recognized that for the benefits of liberalization to be fully realized, the pace of liberalization has to be in tandem with the capacity and ability of the system to absorb these changes without undermining financial stability. This policy has resulted in a high foreign participation in the Malaysian financial sector.

FINANCIAL STRUCTURE

P2112/1/17

Activity 1A

TEST YOUR UNDERSTANDING BEFORE YOU CONTINUE WITH THE NEXT INPUT! 1.1 Describe briefly the structure of the financial system in Malaysia.

1.2 What are the roles of the financial institutions and financial intermediaries in the development of a country?

1.3 List down three sources and uses of the financial system funds.

FINANCIAL STRUCTURE

P2112/1/18

Feedback To Activity 1A

1.1 a) Financial institution i. ii. Banking system Non-bank financial intermediaries

b) Financial markets i. Money and foreign exchange markets

ii. Capital market iii. Derivative market iv. Offshore market

1.2 a) Intermediation function b) Operation of the payment system c) As a channel for transmission of monetary policy

1.3 Sources of fund: a) Deposits b) Insurance, provident and pension funds c) Capital, reserve and profit

Uses of fund:

a) Loans and advances b) Securities c) Deposits with other financial institutions

FINANCIAL STRUCTURE

P2112/1/19

INPUT

1.3

FLOW OF FUNDS AND DIRECTION OF CREDITS

FLOW OF FUNDS IN AN ECONOMY The evolution of a financial system can be broadly categorized into four basic stages. 1. Barter trade to monetary system The first stage is when the economy moves from a barter trade system into a monetary system, whereby commodity money was used as the basic transmission unit. Under this system, tokens, often made of precious metals served as a standard unit of account and measures of value to facilitate trade. 2. Saving and borrowing practices The second stage came when the practice of borrowing began. Funds accumulated by wealthy persons were loaned to other individuals or companies who were willing to pay for these funds for a fee or interest. This is where those economic units who are in need of funds deficit units came to terms with those who have excess funds to be lent out or called surplus units. At this stage, however, there are some problems such as the difference in amount, maturity and the element of risks.

3. Establishment of financial intermediaries The third stage came following the establishment of financial intermediaries to overcome the problems of primary debt in the direct borrowing-lending process. During this stage, financial intermediaries mobilize from the surplus units and reduce their risk of default by issuing relatively risk-free liabilities. At the same time, through their specialized knowledge of the credit market, they were able to supply funds to deficit units

FINANCIAL STRUCTURE

P2112/1/20

in the amount and terms that these units were willing to pay to meet its financing needs. The liabilities of these financial intermediaries are known as secondary or indirect debt.

4. Varied financial instruments The final stage is when a complete set of financial intermediaries were established to form a financial system which provide a variety of financial instruments as saving media for the surplus units, as well as a varied range of credit and investment facilities to meet the financing requirements of the deficit units. In of Malaysia, the country can be considered to have arrived at the final stage of the evolution process in establishing a complete monetary system.

Major sectors of the economy To illustrate how fund flows in an economy with a developed financial system, it can be divided into five major institutional sectors. These sectors are: a) households b) enterprises c) government d) financial institutions e) external sectors

Each sector has different sources and uses of funds from the other sectors and behaves relatively homogeneous as a group.

The household sector, as a group is usually the major net surplus unit in an economy since they save a large proportion of their income and invest their savings in the form of real and financial assets. However, not all households are surplus units as a significant proportion of the funds mobilized by the financial intermediaries are channeled back to household in the form of consumer credits and housing loans.

FINANCIAL STRUCTURE

P2112/1/21

The private enterprises and the government sectors are usually the deficit units since they are the sectors primarily involved in the investment process in an economy. These sectors mobilize resources mainly through the financial system in the form of loans equity capital, bills and long-term securities.

The financial system basically serves to assist in the allocation of scarce resources in an economy from the surplus units to the deficit units. To do this, an efficient recycling mechanism is essential in order that scarce resources would be used to their optimum for the development of the nation.

Financial intermediaries primarily operate in two markets. First is the saving markets where they operate as borrowers while meeting the demand for financial assets by surplus units. To fulfill this function, financial institutions have introduced various savings and investment instruments to attract funds from the surplus units. The other one is the credit market where financial intermediaries supply the financial resources required by the deficit units. Here, again, they offer various financial instruments as a conduit to supply funds to the deficit units.

Under the present situation, financial intermediaries operate in various markets such as the money and foreign exchange markets, the capital markets and the financial futures and option markets.

FINANCIAL STRUCTURE

P2112/1/22

SOURCES OF FUNDS FINANCIAL INTERMEDIARIES SURPLUS UNIT FINANCIAL INSTRUMENTS

USES OF FUNDS FINANCIAL INSTRUMENTS DEFICIT UNITS

Saving or Investment of: Households Enterprises Government Financial institutions External sector

Currency Deposits Bills Loans Bonds Unit trusts Share capital Insurance premiums Provident funds Pension funds Foreign loans Investments

Central bank Commercial banks Finance companies Merchant banks Discount houses Industrial Fin. Inst. Saving inst. Provident funds Pension funds Insurance companies Unit trusts Building societies Cooperatives Other fin. inst.

Investment or expenditure of: Money at call Overdrafts Bills Term loans Hire purchase Bridging loans Leasing Securities Bonds Debentures External reserves Households Enterprises Government Financial institutions External sector

Table 1.3 The flow of funds in an economy

FINANCIAL STRUCTURE

P2112/1/23

DIRECTION OF CREDITS The financial system extended credit to the non-financial private sector in the form of loans and advances, as well as through the holding of corporate securities. Figure 1.2 below provides a graphic illustration of the change in the direction of credit to the non-financial private sector over the period. Sector 1988 1998 Investment in corporate securities 11.5% 24.0% Manufacturing 15.6% 9.7% Construction 18.8% 15.6% Housing 13.7% 11.1% Consumption credit 4.1% 8.5% Purchase of shares 1.1% 4.8% Others 35.3% 26.3% Table 1.4 Direction of credit. (% of total credit outstanding)
(Source: The Central Bank and the Financial System in Malaysia A Decade of Change; BNM 1999)

40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

Investm ent in corporate securities Manufacturing

Construction

Housing

Consum ption credit Purchase of shares Others

Figure 1.2: Direction of credit (1988)

FINANCIAL STRUCTURE

P2112/1/24

30.00%

Investm ent in corporate securities Manufacturing Construction Housing Consum ption credit

25.00%

20.00%

15.00%

10.00% Purchase of shares 5.00% Others 0.00%

Figure 1.3: Direction of credit (1998)

1.4 LATEST MONETARY POLICIES The Malaysian economy was fundamentally strong prior to the start of the crisis. In the first two quarters of 1997, real GDP continued to grow at about 8%. The government continued to record fiscal surpluses and, very importantly, the level of external debt was low at 43.2% of GNP. At the end of 1997, the fundamentals of the economy were strengthened further. The economic growth was achieved resulting in a lower inflation rate and an improved balance of payments position. In the banking sector, the structural reforms undertaken since the mid-1980s strengthened the banking system.

Given the strong macroeconomic and institutional fundamentals at the outset of the crisis, Malaysia had greater flexibility in responding to the crisis. While there were structural imbalances present such as the current account deficit, asset inflation and high credit growth, policies were already in place to address these weaknesses and positive results began to emerge.

FINANCIAL STRUCTURE

P2112/1/25

Despite strong fundamentals, the East Asian financial crisis affected Malaysian economy in numerous ways. In addition to instability of financial markets, the crisis affected the real sector and weakened the financial sector. Towards the end of 1997, the real GDP increased by 7.5% (10% in 1996). However, in 1998, the real GDP declined by 7.5%. That was the first negative growth registered since 1985 and the trough was reached in the third quarter of 1998. The crisis affected all the broad sectors in Malaysian economy including the financial, real and external sectors. However, due to the stronger fundamentals and affirmative action to eradicate poverty, the social consequences from the crisis was less severe on Malaysia.

The impact of the crisis on Malaysian economy was discussed as below:

Depreciation of Ringgit The crisis was felt in the KL foreign exchange and stock markets. Between end of June 1997 and end of December 1998, ringgit was depreciated by 33.6% against the United States Dollar. It was further depreciated to a historic low of RM4.88 against the US Dollar on 7th January 1998, but strengthened thereafter. From February to June 1998, the value of ringgit was relatively stable between US$1= RM3.84-3.98. From June to August 1998, the downward pressure on ringgit was intensified following the depreciation of the Japanese Yen, the contraction in the domestic economy and increased speculative activity.

The immediate impact of the ringgit depreciation was on the stock market, with the Kuala Lumpur Stock Exchange Composite Index (KLSE CI) declining about 144.8% in the second half 1997. As the contagion spread in the region, investors confidence was further eroded, the reversal of short-term capital flows caused the ringgit to be depreciated further by as much as 20% on 7th January 1998 and the KLSE CI to decline to as low as 286 points on 1st September 1998.

FINANCIAL STRUCTURE

P2112/1/26

State of the banking system The sharp depreciation of ringgit combined with the fall in share prices had a material adverse effects on earnings and overall performance of the banking sector. The decline in the property and stock markets, the debt-servicing capacity of borrowers was also affected by the economic contraction, resulting in deterioration in the asset quality of the portfolio of the banking institutions. The reluctance of the banking institutions to lend, combined with higher interest rate led to severe difficulties for individuals and businesses, including viable businesses in productive economic activities, to obtain financing. These development caused loan growth (including loans sold to Danaharta) to slow down from of 26.5% at the end of 1997 to 1.3% at the end of 1998.

Inflation The price pressures arose from the depreciation of ringgit became apparent towards the end of 1997. Inflation, in terms of CPI, peaked at 6.2% on an annual basis in June 1998, and moderated thereafter. In 1998 alone, the CPI rose by 5.3%, the highest increase since 1982. The PPI also increased by 10.7% in 1998 (2.7% in 1997). The rather mild inflation, despite the severe depreciation, was due mainly to the contraction of domestic demand.

FINANCIAL STRUCTURE

P2112/1/27

Policy response to the crisis. Initial Policy Response

Initially, Malaysia did follow some of the standard IMF prescriptions adopted by other crisis countries, but subsequently choose a different route. While the policy direction was changed early in the crisis, the ultimate objective of ensuring growth with the price stability remained unchanged. The selective exchange control measures were a necessary part of the efforts to stabilize domestic financial markets to ensure that the prospects for an economic recovery would not be jeopardized by external developments and contagion.

High interest rate to contain speculation against the ringgit was adopted only for a brief period. When it proved ineffective, interest rate were restored to pre-crisis levels soon after, and were maintained till September 1997. Thereafter, interest rates were adjusted to reflect higher rates of inflation to ensure a positive real rate of return to savers.

As higher interest rates were considered detrimental to the real sector, a credit plan was introduced in September 1997 to moderate loan growth. The target loan growth rate was set as 25% by the end 1997 (from 29% at end September 1997), a 20% by the end of the first quarter of 1998 and 15% by the end of 1998. In addition, more stringent guidelines were imposed on hire purchase loans for non-commercial passenger vehicles.

With respect to fiscal policy, the government reduced its expenditure and deferred implementation of selected infrastructure projects. The government, however, ensured that budget allocations with respect to health, education and the provision of other basic amenities were maintained. In early 1998, the IMF advised against Malaysias plans to reverse fiscal policy to a deficit position to arrest emerging signs of economic contraction. However, in April may 1998, when it was clear that the economy was contracting, Malaysia unilaterally allocated additional fiscal expenditures amounting to RM3 billion. In the financial sector, prudential regulations of the financial sector were adjusted further to be consistent with international standards. This included reclassification of loans as nonperforming which had been in arrears for 3 months (instead of 6 month previously),

FINANCIAL STRUCTURE

P2112/1/28

increasing the rate for general provisioning and requiring greater financial disclosure by banking institutions.

The need for a change in policy direction

The combination of tight monetary policy and fiscal restraint adopted in an environment of weakening external demand caused aggregate demand to fall more sharply than anticipated. Then, the Malaysian Government adopted a more comprehensive and forward-looking policy approach. Policies were formulated taking into account the likely developments and the associated risks. The approach was a pragmatic one to adjust the policy direction to the changing economic circumstances.

Economic Recovery Plan Mid 1998 Beginning mid-1998, the policy focus shifted towards reviving the economy. In view of this objective, the government eased its monetary and fiscal policies. Amidst the deteriorating economic conditions, the National Economic Action Council (NEAC) was established on 7 January 1998 to make concrete recommendations to the government to arrest the worsening economic situation and revitalize the economy. On 23 July 1998, the NEAC launched the National Economic Recovery Plan (NERP) to provide a comprehensive framework for economic recovery and to counter the negative impact of the ringgit depreciation and the decline of the stock market.

The NERP had six objectives, which included the short-term focus of stabilizing the ringgit; restoring market confidence; and maintaining financial market stability. These were complemented with structural reform objectives of strengthening economic fundamentals; continuing the socio-economic agenda; and restoring adversely affected sectors.

Since early August 1998, monetary policy has become accommodative by reducing interest rates and the SRR to reinforce expansionary fiscal policy and revive the economy. The 3month intervention rate of BNM was reduced in three successive steps, from 11% to 9.5%

FINANCIAL STRUCTURE

P2112/1/29

during the month of August. The SRR was reduced from 8% to 6 % on 1 September, when the selective exchange controls were imposed and further to 4% on 16 September in order to ensure adequate liquidity in the banking system and to reduce their cost of funds.

The importance of the efficient functioning of the intermediation role of the banking institutions came to the forefront during the crisis period. In an environment of uncertainty, banking institutions had become excessively cautious in their lending decisions, causing a sharp slowdown in credit. To avoid a credit crunch situation, banking institutions with sufficient capacity were encouraged to achieve a minimum loan growth rate of 8% for 1998.

Pre-emptive measures were also introduced to strengthen the resilience of the financial sector to avoid systemic risks and to ensure the continued efficient functioning of the banking sector and promote market confidence in the face of deteriorating economic conditions. The measures were multi-pronged - aimed at strengthening all aspects of the financial system. The measures included the consolidation of the finance companies, the establishment of Danaharta, to purchase NPLs from banking institutions and manage these NPLs in order to maximize their recovery value; Danmodal, to facilitate the recapitalisation of banking institutions; and the Corporate Debt Restructuring Committee (CDRC), a platform for both the borrowers and the creditors to work out feasible debt restructuring schemes without having to resort to legal proceedings.

Selective Exchange Control Measures The selective exchange control measures were designed to achieve specific objectives. The controls were aimed specifically at eliminating access to ringgit by speculators by reducing the offshore market in ringgit and limiting the supply of ringgit to speculators. In addition, the measures were also aimed at stabilizing short-term capital flows. They were carefully designed to have minimal impact on economic activities. Thus, rules that governed trade transactions and foreign direct investment were left unchanged. Current account convertibility continued to be maintained. The only requirement was for trade settlements to be carried out in foreign currencies. These measures were essentially aimed at curbing the

FINANCIAL STRUCTURE

P2112/1/30

internationalization of the ringgit. As such, the exchange controls affect only short-term flows. Medium and long-term flows of foreign funds into the country continue to be unaffected by the controls.

The main selective exchange control measures were: control the transfer of funds in the external accounts to immobilize trading of ringgit offshore; control on ringgit loans to non-residents; imposition of the 12-month holding rule on the repatriation of funds in external accounts (replaced by repatriation levy on portfolio funds on 15 February 1999 which was subsequently liberalized further on 21 September 1999); limiting the amount of ringgit that could be imported or exported and the amount of foreign currency that could be exported.

1.5 ACTS THAT REGULATE FINANCIAL INSTITUTION The Banking and Financial Institutions Act 1989 (BAFIA)

A major event which took place in 1989 was the introduction of the Banking and Financial Institutions Act 1989 (BAFIA) to replace the Banking Act 1973 and Finance Companies Act 1969. The introduction of BAFIA was intended to provide an integrated supervision of the Malaysian financial system and to modernize and streamline the laws related to banking and banking institutions.

Rationale for BAFIA The growing competition in the banking system had resulted in the blurring of lines of business between the three traditional groups of banking institutions under the Central Bank supervision, namely, commercial banks, merchant banks and finance companies. This had let to the extent that the methodology of supervision of these institutions had increasingly converged although the legislative basis for supervision was legally

FINANCIAL STRUCTURE

P2112/1/31

separated under the repealed Banking Act 1973 and repealed Finance Companies Act 1969. BAFIA placed all banking institutions supervised by the Central Bank, including discount houses and money and foreign exchange brokers which were previously supervised on an administrative basis, under one supervisory and regulatory scheme. BAFIA was built on the strength of the regulatory regime in the two repealed acts, while the prudential and structural regulatory features essential for ensuring the stability of the banking system have not been changed under the BAFIA.

The Institutions under BAFIA a) Licensed institutions Comprising commercial banks, merchant banks, finance companies, discount houses, money brokers and foreign exchange brokers. b) Scheduled institutions Comprising the major non-bank sources of credit and finance and representative offices of foreign banks or foreign institutions which carry out the business or activities similar to the scheduled institutions. c) Non-scheduled institutions Comprising all other statutory bodies and institutions involved in the provision of finance and credit.

The Offshore Banking Act 1990 The Offshore Banking Act 1990 (OBA) governs the activities of offshore banking and offshore investment banking. Bank and financial institutions intending to operate as an offshore investment bank in Labuan are required to seek a license from the Minister of Finance through Labuan Offshore Financial Services Authority (LOFSA). In the amendments to OBA in 1996, major changes were made, among others, by expanding the definition of offshore banking business to include a wide range of financial services that could be undertaken by offshore banks instead of only providing credit facilities and accepting deposits.

FINANCIAL STRUCTURE

P2112/1/32

The Islamic Banking Act 1983 An act which came into effect on April 7th 1983, to provide for the licensing and regulation of Islamic banking business. The act inter alia has provisions on the financial requirements and duties of an Islamic Bank, ownership, control and management of Islamic banks, restriction of its business, powers of supervision and control over Islamic bank and other general provision such as penalties etc.

1.6 ROLE AND PURPOSE OF REGULATORY BODIES i. Bank Negara Malaysia

Bank Negara Malaysia (BNM) is a regulatory body to have primary oversight of the monetary and banking system in Malaysia. To enable BNM to meet its objectives, it is vested with comprehensive legal powers under various Acts and Ordinances to regulate and supervise the financial system. BNM was also as agent of the government on exchange control matters. Furthermore, effective 1 May 1988, BNM was also responsible for the supervision, regulation and development of the insurance industry as part of the financial system.

ii.

Security Commission

To streamline the regulatory structure of the capital markets, the Security Commission (SC) was established under the Securities Commission Act 1993, as a self-funding statutory body with investigate and enforcement powers. The mission is to promote and maintain fair, efficient, secure and transparent securities and futures markets and to facilitate the orderly development of an innovative and competitive capital market. The SCs many regulatory functions include: Supervising exchanges, clearing houses and central depositors; Registering authority for prospectuses of corporations other than unlisted recreational clubs; Approving authority for corporate bond issues; Regulating all matters relating to securities and futures contracts;

FINANCIAL STRUCTURE

P2112/1/33

Regulating the take-over and mergers of companies; Regulating all matters relating to unit trust schemes; Licensing and supervising all licensed persons; Encouraging self-regulation; and Ensuring proper conduct of market institutions and licensed persons.

FINANCIAL STRUCTURE

P2112/1/34

Activity 1B

TEST YOUR UNDERSTANDING BEFORE YOU CONTINUE TO THE NEXT INPUT! 1.4 List down five major sectors in the economic fund flow.

1.5 Name three special mechanisms which are established to overcome the serious increas NPLs banking industry.

1.6 Name the regulatory bodies in Malaysian financial system.

FINANCIAL STRUCTURE

P2112/1/35

Feedback To Activity 1B

1.4 i) Households ii) Enterprises iii) Government iv) Financial institutions v) External sectors

1.5 Danaharta, Danamodal and Corporate Debt Re-structuring Committee (CDRC)

1.6 Bank Negara Malaysia and Security Commission

FINANCIAL STRUCTURE

P2112/1/36

INPUT

1.7 CHARACTERISTICS, ROLES AND OBJECTIVES OF IOFC The Characteristics of an IOFC An offshore is basically a small territory or jurisdiction that imposes low or no taxes on income, profit, dividend and interest earned or derived from the offshore business activities or transactions carried out by offshore multinational corporation in or from those jurisdictions. Generally also, it does not have any exchange control or limitation or transboundary movement of funds into and out of the jurisdiction by the offshore company, no stamp death, inheritance or estate duties and no value added tax. An IOFC maintains a high degree of secrecy through limitation on public inspection of company files, prohibition from disclosure of the shareholding or beneficial ownership and management of the business, financial or other affairs of the company other than in compliance with the law.

The roles and objectives of IOFC In summary, the objectives of establishing Labuan IOFC are as follows: a) to enhance the attractiveness of Malaysia as an investment centre. b) to supplement the onshore financial system centre in Kuala Lumpur by tapping the growing demand for tailored financial and related services. c) to strengthen the contribution of broad financial sector to the progress of diversified economic growth. d) To form part of the broad national strategy to spread out and diversify the growth opportunities of the nation, focusing attention on the further development of East Malaysia in terms of industrial and services (including tourism) development.

FINANCIAL STRUCTURE

P2112/1/37

1.8 FACTORS THAT CONTRIBUTE TO THE SUCCESSFUL OPERATION OF IOFC There are some factors that contribute to the success of the existing IOFC: a) Political stability in the country which is a crucial factor in the investment decisions of the potential players. b) Stable currency with minimum or no exchange control. c) Banking secrecy and confidentiality coupled with minimum rules and regulations. d) A competitive tax regime. The tax rate imposed on offshore companies is among the lowest in the world. e) Lower operating costs compared to other financial centres in the region. f) Good infrastructural support facilities such as excellent communications and transportation system with other financial centres. g) Professionally qualified and experienced workforce.

1.9 FINANCIAL SERVICES WHICH IS OFFERED BY IOFC AND INCENTIVES GIVEN TO THE PARTICIPANTS

Financial services offered in Labuan IOFC

Some of the international business activities that can be conducted in Labuan IOFC are: a) offshore banking operations b) offshore insurance and offshore insurance-related businesses c) corporate funding d) investments and trust management e) offshore investment holding companies f) professional services and other related services.

FINANCIAL STRUCTURE

P2112/1/38

Incentives to operate in Labuan IOFC

Some of the incentives offered to financial institutions to attract them to operate in Labuan IOFC are: a) Low or no taxes on income, profit, dividend and interest earned from offshore business activities or transactions carried out by the offshore multinational corporation in or from the territory. b) No limitation or exchange control on the movement of funds in or out of the territory (other than the standard exchange control requirements on resident and nonresident institutions). c) No levy stamp, inheritance, death or estate duties and no value added tax. d) Strict rules on confidentiality in the territory or accounts in the territorys banks.

1.10 CHALLENGES OF THE FINANCIAL SECTOR IN GLOBAL ECONOMY The rapid intensification of globalization in recent years has significantly affected the structure and operations of financial institutions all over the world, including Malaysia. Globalisation is rapidly and irreversibly changing the way business and policy are conducted. For instance, the global trend towards liberalization in the financial system has led to the blurring of traditional demarcation lines separating the activities of the different groups of financial institutions and removed artificial barriers to competition. As a result, the array of activities that can be undertaken by different groups of financial institutions is converging.

Technological advances in telecommunications, information processing and computing have been a key factor in integrating financial markets across the globe, and in enabling the design of innovative and complex financial instruments that have helped to improve risk management and shifted risks to those who are better able to manage them. Consequently, economic agents have become willing to assume greater risk, while short-term capital funds have flowed rapidly in large amounts from developed economies into emerging economies since the late 1980s.

FINANCIAL STRUCTURE

P2112/1/39

The measures that have been undertaken so far would serve as the foundation to further enhance the capability and capacity of the domestic financial system, and to achieve the agenda for the financial system, as follows:

To create strong, efficient, competitive and resilient banking system that would be better able to withstand future shocks, thereby, minimizing the adverse implications on macroeconomic stability.

To accelerate implementation of measures to broaden and deepen financial markets and strengthen the financial infrastructure. In particular, efforts will be intensified to increase the proportion of non-bank financing in the economy and diversify risks away from the banking system. In this regard, the further development of the bond market and securitization would be accelerated.

To inculcate strong risk management skills in order to ensure that there is no excessive risk taking that could result in adverse implications, given the increasing volatility of the financial environment.

To promote dynamism in developing new products and management systems.

FINANCIAL STRUCTURE

P2112/1/40

Activity 1C

TEST YOUR UNDERSTANDING BEFORE YOU CONTINUE TO THE NEXT INPUT! 1.7 What are the main objectives of establishing International Offshore Financial Centre (IOFC)?

1.8

What are the challenges faced by the financial sectors in global economy?

FINANCIAL STRUCTURE

P2112/1/41

Feedback To Activity 1C

1.7 To complement Kuala Lumpur as a regional financial centre, strengthen the contributions of the financial services sector to the gross national product of Malaysia and promote the economic development of Labuan and its vicinity.

1.8 i) Liberalization in the financial system ii) Technological advances in telecommunications, information processing and computing.

FINANCIAL STRUCTURE

P2112/1/42

KEY FACTS
1. Briefly the structure of the financial system is as follow: a) Financial institutions i.i Banking system

i.ii Non-bank financial intermediaries b) Financial markets i. Money and foreign exchange markets

ii. Capital market iii. Derivative market iv. Offshore market 2. The roles of financial institutions and financial intermediaries in the countrys development: a) Intermediation function b) Operation of the payment system c) As a channel for transmission of monetary policy

3. The main assets of the financial system: a) Commercial banks b) Provident and pension funds c) Bank Negara Malaysia d) Finance companies

FINANCIAL STRUCTURE

P2112/1/43

4. Financial intermediaries primarily operate in two markets. First in the saving market where they operate as borrowers while meeting the demand for financial assets by surplus units. The other one is the credit market where financial intermediaries supply the financial resources required by the deficit units.

5. The main objectives of establishing International Offshore Financial Center (IOFC) are to complement Kuala Lumpur as a regional financial center, strengthen the contributions of the financial services sector to the gross national product of Malaysia and promote the economic development of Labuan and its vicinity.

FINANCIAL STRUCTURE

P2112/1/44

SELF-ASSESSMENT 1

You are approaching success. Try all the questions in this self-assessment section and check your answers with those given in the Feedback on Self-Assessment 1 given on the next page. If you face any problems, discuss it with your lecturer. Good luck. 1. The Malaysian financial system can be broadly divided into banking system and nonbank financial intermediaries. Distinguish the groups of institutions that fall into the two categories.

2. In an economy, the financial system acts as the conduit for the flow of funds, channeling savings of the economy for productive investment. The more efficient the system of financial intermediation, the more effective it would be in mobilizing previously idle resources for development in those areas that need these funds the most. Describe how funds flow an economy. Identify the units that are considered having surplus funds and those in need of funds.

FINANCIAL STRUCTURE

P2112/1/45

Feedback To Self-Assessment 1

1.

a) Financial Institutions The banking system which is the major component of the financial sector consists of: Bank Negara Malaysia Commercial banks (include Bank Islam Malaysia Berhad and Bank Muamalat Malaysia Berhad) Finance companies Merchant banks Discount houses Foreign banks representative offices

They are regulated and supervised by the central bank.

b) Non-bank financial intermediaries The non-bank financial intermediaries are mainly supervised by other government agencies. These institutions can be divided into five major groups consisting of: i. ii. iii. iv. v. Provident and pension funds Insurance companies Development financial institutions Saving institutions Other non-bank financial intermediaries comprising Unit trusts, Pilgrims Fund board, Housing Credit Institutions, Cagamas Berhad, Credit Guarantee Corporation, Leasing Companies, Factoring Companies and Venture Capital Companies.

FINANCIAL STRUCTURE

P2112/1/46

2. The flow of fund is presented in graphical form table below to provide information on how savings are mobilized through the organized financial system including banking institutions. It also illustrate how these funds are utilized.

Private sector savings Financial Intermediaries: Saving and Other Financial Institutions

Private Investment Accumulation of International Reserves

Net Inflow of Long-Term Funds

TOTAL FLOWS OF CAPITAL FUNDS

Public sector savings

Unidentified private payments abroad Public investment

The units that are considered having surplus funds and those in need of funds: Household: usually the major net surplus unit Enterprises: usually the deficit units Government: usually the deficit units External sector: usually the deficit units
CONGRATULATIONS!!!!.. May success be with you always.

R I G F F c F c F u r m i u v l a a t t e i o i n n v o e f s t i m n e t n e t r n a t i o n a l r e s e r v e s