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BANK NEGARA MALAYSIA &

FINANCIAL SYSTEM

OUTLINES:
The roles of BNM
Monetary Instruments
tools
Financial System

INTRODUCTION
Was established on Jan 26, 1959.
Was set up due to the need for the management
of the countrys money and credit situation.
BNM also as the controller and supervisor of the
institutions under the banking system

OBJECTIVES of BNM
The objectives of the central bank are defined as:

1. To issue current and keep reserves in safeguarding the value

of money.
Sole right to issue currency started on june 12, 1967 (unit: msian
dollar)
Holds & manages international currency reserves (gold, forex major
components). Ringgit is to be fully backed by external reserves.
Since sept 1975 the external value of the ringgit has been determined in
terms of a composite basket comprising the currencies of major trading
partners of msian.

2. To act as a banker and fin advisor/agent to

government
Provides banking services & management of government accounts
check facilities, accepts funds, make payments, foreign
exchange business.
Source of funds to government.
- Temporary advances to cover deficit in the budget.
- Legal limitations to the amount and duration of the loans.
Management of national debt
- Advises about the term & timing of loans & issue of new types of
securities.

3. To promote monetary stability and sound

financial structure.
Formulates & implements monetary policies.

Management of the banking system

Lender of last resort to banks.
Rules for sound practices : CBO 1958, BAFIA 1989, Islamic

banking act 1983.

Licensing of banks and non-banks
Provides facilities for settling indebtedness among commercial

banks and provides for the transfer of funds between centers.

Currency distribution
Investigation and inspection.

4.To influence the credit situation to the advantage of

the country.
Regulates and allocates credit in accordance with what it perceives to be the
requirements of the economy.

5.To promote the reliable, efficient and smooth operation

of national payment and settlement systems.

Oversees the payment system includes formulating policies and guidelines to
regulate the payment system.
Operates the payments system
Facilitates further development of the payments system-BNM encourages the
payments industry to adopt best practices, international standards and cutting
edge technologies in enhancing the payment system

FUNCTIONS OF CENTRAL BANK OF

MALAYSIA
FUNCTIO
NS OF
BNM

Banker for Currency issue

Keeper of international
Reserves
Government banker and
advisor
Responsibility for monetary
policy

Banker to the banks

POWERS OF CENTRAL BANKS

CENTRAL BANK ORDINANCE (CBO)1959

The Central Bank of Malaysia Act 1958

(revised 1994)
Provides for the administration and specify the objectives of the
Central Bank.
Specifies the powers and duties of the CB in relation to:
The issuance of currency
Maintenance of external reserve
Authorized business of the bank
Specific powers to deal with ailing institutions
General provisions on the Banks accounts, powers to
compound etc

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Islamic Banking Act 1983

To provide for the licensing and regulation of Islamic
Banking business.
Provision on:
The requirements and duties of an Islamic Bank
Ownership, control and management of Islamic banks
Restriction on its business
Power of supervision and control over Islamic bank
Other general provisions such as penalties etc.

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Takaful Act 1984

Takaful:
Insurance in Islam.
To reduce risk of loss due to misfortune.
Resources are pooled to help the needy & should not contradict Syariah.
In line with the principal of compensation and shared responsibility
among the community.
A scheme based on brotherhood, solidarity & mutual assistance which
provides for mutual financial aid assistance to the participants in case of
need.

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Takaful Act 1984

To provide for:
The registration and regulation of takaful
business in Malaysia
For the purposes relating to or connected
with takaful

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Insurance Act 1963

Provision of act deal with the licensing of:
Insurers,
Insurance brokers
Adjusters
Reinsurers

Provide for the matters relating to policies, insurance

guarantee scheme fund, enforcement powers of the BNM,
offences and other general provisions.

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Insurance Act 1963

Deals with:
Setting up of subsidiary& offices
Establishment of insurance fund
Direction and control of defaulting insurers
The control on management of licensee
Accounts of licensee
Examination and investigation powers of the BNM
Winding up
The appointment of directors and CEO
Outsourcing of core insurance activities

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The Offshore Banking Act 1990

Stated the functions, powers and duties of the bank.
Provision on:
Licensing of Offshore Banks
Offshore banking business to be carried on only under
license
Submission of application for license to bank
Grant or refusal of license by Minister
Revocation of license or surrender of license
Minimum amount of capital funds

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Duties of Licensed Offshore Banks

Offices and subsidiaries
Prohibition of certain accounts
Appointment and duties of auditor
Financial statements to be submitted to bank
License fees
Transactions in Malaysia currency is prohibited

Y
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MONE

MONETARY POLICY
Management of money supply.
Substantial changes in money supply will give
impact to the economic conditions.
In order to promote monetary stability, BNM will
influence the money supply level through the
employment of monetary tools.

MONETARY POLICY
Central Bank of Malaysia ordinance (CBO) 1958: BNM is
empowered to regulate the supply of money & credit
creation through:
Qualitative measures
Interest rate Ceiling
Selected Credit Control
Moral Suasion
Quantitative measures
Statutory reserved requirement (SRQ)
Minimum Liquidity Requirement (MLR)
Money Market Operation (MMO)

QUALITATIVE MEASURES
Selected Credit
Control
Interest Rate
Ceiling
Eg. Involved in
setting the
minimum lending
rates for bank
loans.

These measure
are used in
regulating the
volume and
direction of credit

Qualitati
ve
Measure
s

Moral Suasion
Inducing a
voluntary
response from the
financial system
to its policy
initiatives

Qualitative Measures

1) Interest Rate Ceiling

Prior to 1978, CB involved in setting the minimum lending rates for bank loans &
ceiling on interest rates offered for deposits
Since 1971, steps to deregulate interest rates was taken
Encourage a market-oriented system of interest rate
Reflect the true cost of funds
October 1978, CB allowed commercial banks to determine the deposit and
lending rates
Among the most effective measures available to CB in regulating volume &
direction of credit
To ensure the economic & social objectives are met, consistent with the national
objectives
Done by holding down demand for credit without limiting the available supply; do
not raise interest rates

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2) Selected Credit Control

Among the most effective measures available to CB in regulating

volume & direction of credit

To ensure the economic & social objectives are met, consistent

with the national objectives

Done by holding down demand for credit without limiting the

available supply; do not raise interest rates

Examples:
Guidelines on Hire-Purchase Loans for buying private motor

vehicles
Guidelines on Credit Card Operations

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3) Moral Suasion
Refers to a traditional central bank technique of
informally inducing a voluntary response from the
financial system to its policy initiatives
Examples:
Discourage financial institutions to lend excessively for
speculation activity
Encourage to extend more longer-term financing loans
Encourage to step up lending to priority areas such as
Bumiputera community & small borrowers
Urged to limit lending secured by shares

QUANTITATIVE MEASURES
Liquidity
Requirement
The banking
institutions
required to
observed min
liquidity ratio.

Statutory
Reserve
Requirement
(SSR)
SSR = Eligible
liabilities which
comprise REPOs +
NCDs + Interbank

Monetary
Market
Operations
Influence the
liquidity situation
in a system

Quanitat
ive
Measure
s

Discount
Operation

Centralization
of Gov & EPF
Deposit with
The Central
Banks

 Quantitative measures
1) Statutory Reserve Requirements (SRR)
Sec 37 (1)(c) of CBO
All banking institutions required to place certain % of EL as
cash reserves with BNM
Banks eligible liabilities (EL): deposits & net interbank
borrowings
Powerful monetary instrument; affects level of deposits &
loans of a bank
Higher % of SRR, reduce amount of deposits & loans
SRR immobilized in CB & do not earn interest; cost
passed on to customers thru higher lending rate

2) Minimum Liquidity Requirements (MLR)

Sec 38 (1) BAFIA 1989
Banking institutions required to observe a minimum liquidity
ratio
As % of EL; operates the same manner as SRR
MLR immobilized in the bank & do yield a return
Reasons for imposition of MLR:
To ensure the banking institutions are liquid at all times
To encourage direct credit to desired areas
To ensure continuous & ready financing of Governments
development projects
To influence the liquidity situation in the banking system

3) Money Market Operations (MMO)

Operations conducted by CB to influence the liquidity situation in
the system
Can be conducted by:
Open market operations (OMO)
Involves purchase & sale of Government papers by CB in open
organized markets. Affect directly reserves of banks & thereby
flow of bank credit and money. Initiative taken solely by CB
Borrowing or lending
In situation CB face limited access to OMO due to shortage of
papers. More widely used; smoothen seasonal fluctuation in
liquidity. Normally undertaken in short-term maturity periods of
one to three months. Advantage is flexibility; (maturity, rate of
interest structure & amount) can be varied