The Malaysian financial system and landscape have undergone a major transformation in this recent decade. The financial sector reforms, with the Asian financial crisis acted as catalyst, have evolved a complex financial system. The rapid growth in the volume of financial transaction and the interdependence to global economy has resulted in greater potential vulnerabilities and risks to the stability of the financial system.
The Central Bank of Malaysia, Bank Negara Malaysia (BNM) and the Securities Commission (SC), the autonomy bodies mandated with responsibilities for promoting a sound and efficient financial system whilst preserving the financial stability, has undertake a rigorous approach to ensure the inherent risks associated to the financial environment continue to be prudently managed. The Malaysian financial system is primarily encompassing of the banking system, non-bank financial intermediaries (NBFIs) and financial markets.
The banking system in Malaysia consists of the Central Bank, commercial banks, Islamic banks and investment banks. The commercial banks and Islamic banking[1] systems coexist and operate in parallel. Recently, BNM is responsible for the process of amalgamation of discount houses, merchant banks and the universal stockbroking companies into investment banks.
The non-bank financial intermediaries (NBFIs) complement the banking system in mobilising savings and meeting the requirements of specific economic sectors. These institutions are the development financial institutions (DFIs)[2], provident and pension funds, insurance companies, takaful operators, savings institutions and unit and property trusts account.
The financial markets in Malaysia comprise the money and foreign exchange markets, the capital market and derivatives market. In the money market, interbank deposits and the short-term money market instruments facilitate channelling of funds between surplus and deficit units while foreign exchange market is where the international currencies are traded, including hedging, spot and swap transactions. The capital market comprising the equity and bond markets. The derivatives market which consists of over-the-counter and exchange-traded derivatives for risk management and investment purposes. Given the diversity and complexity of the financial system, the BNM will regulate the market economy through its regulation and supervision of the licensed financial institutions.
The foremost of BNM’s regulatory power would be no person is legally allowed to undertake banking business in Malaysia unless has been granted license for operation. It also may make recommendations to the Minister for imposition of restrictions on the activities of the bank or revocation of its license. Among others, it also conferred with power to set the rate of interests, policies on granting loans and to determine the required reserves percentage to be held as reserves from the banking institutions.
The supervisory and surveillance functions of BNM has evolved. BNM has adopt a risk-based approach where supervisory resources are prioritised towards areas that pose significant risks to the stability and soundness of the financial system and individual financial institutions known as the Basel II approach[3] as the supervisory framework to assess financial institutions’ risk profiles and risk management systems. The enhanced supervisory framework also called for greater reliance on internal and external auditors where their views and expectations on the new developments and challenges facing the financial industry are exchanged.
An essential part of the financial infrastructure is the co-ordination of an effective flow of surplus funds from the savers to the investors and an efficient payment system. BNM is responsible to ensure the continued reliability of major payment systems to sustain public confidence in the retail payment systems and payment instruments. The secure payment and settlement system[4] has been instrumental in facilitating settlement, custody and delivery of financial products and services. BNM has emphasis the need for a good corporate governance to be put into practice in every financial institutions not only to prevent any financial disruption, to safeguard public interest and avoiding of conflict of interests, but to ensure transparencies in every way.
The evolvement of domestic financial landscape also involved greater cross-market and cross-industry integration and consolidation, adding to a blurring of the lines between capital market and banking activities. Therefore, regulatory and supervisory framework was enhanced to ensure harmonisation of rules and regulations between BNM and SC. BNM and SC has agreed to coordinate working arrangements and investment banks to be co-regulated by both authorities.
SC, on the other hand is the apex regulatory organ of capital market, established under Securities Commission Act 1993 with objective to promote of an orderly and active capital market. One of the main activity of SC is protecting the trading of securities and future contracts and responsible to suppress any illegal and improper practices in trading. SC also maintains surveillance over the market to enhance efficiency and transparencies in every way. SC will also determine the volume and the time of such securities to be sold. It also govern all securities dealers, issuing houses, stockbrokers and investment advisers by way of such securities must be registered with SC accompanied with draft prospectus to promote efficiency in fund raising process. It also provides investment advice.
SC also responsible in supervising the issuance of debt securities or corporate bonds and authorisation of unit trusts. Furthermore, SC also supervises and regulates any arrangements for mergers and acquisitions of companies to ensure that there’ll be no issue on monopoly will arise. In fact, SC is empowered to revoke such action and to some extent, to prosecute the institution before court of law.
SC moves to broaden capital market and enhance its regulatory framework. One of its initiative is the establishment of SC Shariah advisory council where the council will assess any application for securities to be deemed as Shariah compliance. Recently, SC has also introduce the new structured warrant products and the Islamic REITs for global investment opportunities for investors.
As a conclusion, both BNM and SC activities in regulating and supervising the financial market are indispensable. At some extent, both parties will directly involve in regulating the market.
[1] Islamic banking activities conducted either by Islamic banks or through Islamic banking arms of commercial banks.
[2] The DFIs regulated by Bank Negara Malaysia under the Development Financial Institutions Act 2002 are the Bank Pembangunan Malaysia Berhad, Bank Perusahaan Kecil & Sederhana Malaysia (SME Bank), Export-Import Bank of Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional and Bank Pertanian Malaysia.
[3] Basell II approach : is the risk-based audit methodology where supervisory and surveillance resources are prioritised towards area that pose significant risks
[4] Payment and Settlement Systems eg. RENTAS (real time gross settlement system), SPICK (national image cheque clearing system), e-Debit (domestic debit card network), Financial Process Exchange (internet payment system), MEPS (Malaysian Electronic Payment System), Interbank Giro (batch-oriented inter-bank funds transfer system)
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