Program : Degree

Course : Malaysian Economy

Code : ECMB313

Credit Hours : 03

Contact Hours : 03

Semester : Semester 1 Academic Year 2012/2013

Subject Synopsis

This course provides the student with an overview of the Malaysian economy - the role of the government and its economic interaction with other countries in the region. Topics such as government economic plans and policies, income distribution and poverty eradication, labour force and labour relations, the financial system and international trade and investment will be covered in this course.

Learning Outcomes

At the end of this course, students are expected to:

1. Critically analyse the Malaysian economy and its components.

2. Apprehend the economic development of the nation thus far.

3. Apprehend fundamental economic analysis provided by the media.

4. Rationally analyse the macro economy environment and the external factors in business decision-makings.

5. Assess, analyze and suggest appropriately methods on economy crisis.

6. Rationally analyse the implication of macro economy environment, current issues and implications of the current policies.

Sunday, May 27, 2012

5: Central Bank and Financial System in Malaysia


The evolution of Malaysia’s financial sector after independence

• In the beginning, the monetary authority in the federation of Malaya was the Board of Commissioners of currency, Malaya and British Borneo.

• On January 24, 1959, central Bank of Malaysia was officially opened.

• The prime objectives of the bank have been to maintain a strong ringgit, promote financial stability and foster growth of a sound financial structure.

• Financial system was dominated by the branches of the British banks, designed to serve and promote the well-being of British

• Tun Ismail Mohamed Ali served as the second governor of Bank Negara from July 1962 to July 1980. He sought to promote and strengthen domestic banks to match the branches of the foreign banks in the country.

• During 1960s, the attention of our financial sector through Bank Negara was focused on building up the financial infrastructure. It witnessed the development of strong domestic commercial banks and widespread branching of banking services.

• Also set up during the period the Kuala Lumpur Stock Exchange (KLSE), discount houses, Pilgrims Management and Fund Board (LUTH), Pernas (the national investment and trading corporation), agriculture bank, Capital Issues Committee and Malaysian Industrial Development Finance.

• In the 1970s emphasis was put on in inculcating integrity and professionalism in bank management. Credit Guarantee Corporation was set up to ensure that small borrowers had access to bank credit at reasonable cost. Post office savings bank was introduced to mobilize small savings.

• Foreign exchange market was set up to serve the nation’s international trade but also to promoter Kuala Lumpur as an international centre for the trading of primary commodities. Merchant banks and development banks were set up.

• The Kuala Lumpur Commodity Exchange (KLCE) was established and a market for long term Malaysian Government securities was encouraged.

• In the 1980s, financial authorities adopted a stance of fostering greater financial discipline among the financial institutions, while ensuring that adequate bank credit was made available to private investors at reasonable cost. Bank Islam was set up in 1983 to promote the Islamic banking. First merger, United Asian Bank (UAB) merged with Bank of Commerce.

• Non-financial institution were revamped and strengthened to promote the growth of small-scale industries. Those involved were CGC, Bank Industri and Malaysia Export Credit Insurance Bhd.

• In the 1990s, the most important scenario was the complete deregulation of the interest rate regime. On February 1991, BLR of the banking institutions were completely freed from the administrative control of Bank Negara; that is, BLRs were allowed to be determined on the basis of each banking institutions’ own cost of fund. With effect from November 1995, each bank was allowed to quote its own BLR at any level subject to an industry ceiling rate.

• It permitted greater flexibility for banking institutions to respond more quickly to changes in market liquidity situations and also encouraged greater competition and efficiency within the banking industry.

• Securities Commission (SC) was set up on March 1, 1993. it becomes the watchdog for the securities, options and financial futures industries as well capital market instruments. SC absorbed the functions of the Capital Issues Committee and Panel on Takeovers and Mergers. Future Industry Act 1992 came into force on 1 March 1993.

• This act provides the underlying regulatory framework of the financial system. International Offshore Financial Center (IOFC) was established in October 1990. It enhances the contribution of the broad financial sector to economic growth. January 3, 1994, Islamic inter-bank money market was introduced, making Malaysia the first country with a full-fledged Islamic banking system which functions on a parallel basis with the conventional system.

• Bank Negara Malaysia and its roles in promoting growth

The entity responsible for overseeing the monetary for nation

Monetary policy
The actions of a central bank, currency board or other regulatory committee, the determine the size and rate of growth of the money supply, which in turn affects interest rates.

How the central bank influences an economy

i. Macroeconomic approach – when regulating inflation and price stability

ii. Microeconomic approach – when functioning as a lender of last resort

Macroeconomic influences
- As it is responsible for price stability, the central bank must regulate the level of inflation by controlling the money supplies by means of monetary policy.

- This open bank performs open market transaction that either inject the market with liquidity or absorb extra funs, direct affecting the level of inflation

Microeconomic influences
- A commercial bank offers funds, if the commercial bank does not have enough liquidity, the commercial bank can turn to central bank to borrow additional funds.

- The central bank may require all commercial bank to keep reserve/deposit ratio.

- Enforcing a policy of commercial bank reserves functions as another means to control money supply in the market.


1. Banker for currency issue
the central bank is the sole currency issuing authority in the country

2. Keeper of international reserve
- Holding of country’s official external reserve are centralized at the Central Bank.

- The Central Bank’s international reserve comprise gold, foreign exchange, reserve position with IMF and holding of special drawing rights.

- To safeguard the external value of ringgit, the Central Bank Act, 1958 provides for the maintenance of minimum external reserve backing of 80.59% against the currency issue

3. Government banker and financial advisor
- The Central Bank acts as a banker, fiscal agent and financial advisor to the government.

- Close cooperation between the government and the bank is also evident from the centralization of government deposit with bank.

- With this arrangement, government receipts, arising mainly from the new issue of government securities, tax, and dividend payments are placed with the bank and managed by the bank depending on the liquidity situation of the system.

- The central Bank manages the government accounts and performs the same functions as the commercial banks perform for their customer.

- The Central Bank also empowered to provide temporary advances to the government to cover ant deficit in the budget revenue.

- The Central Bank manages the public debt and is responsible for the floatation of government loans, both in Malaysia and abroad.

4. The agency responsible for monetary policies and management of the financial system.

- The Central Bank analyses and assesses the development in the international and domestic economy and highlight the area that need to be addressed.

- Central Bank undertakes economy intelligence and surveillance and carries out forecast on the economic condition of the country.

- Base on these assessments, CB presents policy recommendations at regular briefings to the Ministry of Finance as well as at various economic policy making forums at the national level.

5. Banker to the commercial bank
- Central Bank develops institutions and market infrastructure for the development of modern and strong financial systems to contributing to the strengthening of the foundation of the economy.

- Central Bank has built strong payments systems. These systems are regularly `upgraded’ to address the impact of technology on banking systems/ to promote a good credit among banking institutions. Central Bank also operates the Central Credit Reference Information System.

- This allows banking institution to make informed decisions on loan applications.


It was established on 26 January 1959, under Central Bank of Malaya Ordinance, 1958, with following objectives:

i. to issue currency and keep reserves safeguarding the value of money

ii. to act as a banker and financial adviser to government

iii. to promote monetary stability and a sound financial structure

iv. to promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to advantages of Malaysian

v. To influence the credit situation to the advantage of the country.


i. The BNM ensures that the availability and cost of money and credit in the economy are consonant with national macroeconomic objectives.

ii. The BNM acts as the banker for currency issue, keeper of international reserves and safeguarding the value of the ringgit, banker and financial adviser to the government, agency responsible for monetary policy and management of the financial system and banker to the banks.

iii. The goals of the BNM are to achieve sustained economic growth path, high level of employment, maintain stability in the purchasing power of the ringgit, eradication of poverty, to raise the living standard of Malaysians and to achieve a reasonable balance of payments position.

• Development in Financial Market

Recent challenges in the financial sector

The July 1997 currency attacked resulted in the value of Ringgit plummeting to a crisis level. There was some cause for concern before the crisis.
• The economic growth was above the potential output.

• The loss of efficiency in the economy.

• The rising current account deficit

• Excessive expansion to the non-traded sectors.

One of the main measures that the government has taken to tackle the crisis is the formation of the National Economic Action Council on January 7, 1998. Measures adopted were as follows.

• To bring loan classification standards to best practice and require 20% provisioning against the uncollateralized portion of substandard loans.

• To increase the minimum risk-weighted capital ratio (RWCR) of finance companies from 8% to 10% plus increasing the minimum capital funds of finance companies from RM5million to RM300 million and subsequently to RM600 million.

• To expand the capital adequacy framework to incorporate market risk and to reduce the single customer limit from 30% to 25% of capital funds.

• To have more intensive and rigorous supervision including conducting monthly stress tests on individual banking institutions.

• To stabilize the ringgit
• To restore market confidence
• To maintain financial market stability
• To strengthened economic fundamentals
• To continue the equity and socio-economic agenda
• To restore adversely affected sectors.

• To set up Pengurusan Danaharta Nasional Bhd (Danaharta), it is to purchase and manage NPLs with a gross value of RM5 million and above from financial institutions.

• This is to ensure these financial institutions refocus on lending to viable businesses and economic activities, which can support economic recovery. A sum of RM15 billion is expected to be acquired.

• To set up the national asset management company- Danamodal Nasional Bhd (Danamodal). It is to serve as a catalyst to consolidate and rationalize the banking sector as well as accelerate the formation of a core of a strong domestic banking institution which can spearhead the development of the banking system. It had injected a total of RM6.2 billion into 10 banking institutions in the form of Exchangeable Subordinated Capital Loans (ESCL)

• Corporate Debt Restructuring Committee (CDRC). It was set up to provide the forum for both debtors and creditors to work out their debt problems amicably and collectively. CDRC is to facilitate corporate debt restructuring to ensure that viable businesses continue to receive financing for their operations. Jobs and productive capacity will be preserved with minimal losses to creditors, shareholders and other stakeholders.

To further strengthen the economy, some selective exchange controls had been undertaken on September 1, 1998 as follows.

• Ringgit-dominated transactions among non-residents via non-resident external accounts.

• Outflows of short-term capital by requiring such inflows to remain in the country for a minimum period of one year.

• Import and export of ringgit by travelers, both residents and non-residents.
• Malaysian investments abroad which now require approval as there are insufficient funds to be taken out.

However, there are no controls on:

• Current account transactions

• Repatriation of interest, dividends, fees, commissions and the rental income from portfolio investment and other forms of ringgit assets.

• FDI inflows and outflows, including income and capital gains.


  1. Salam sir, thanks for the above notes. may i ask the references used?

    uum student

  2. Tell me more how to make Banking And Finance Jobs Banking And Finance Jobs