The Banking System in Malaysia

Banking, Finance and Exchange Administration

1. The Banking System in Malaysia
The banking system, comprising commercial banks, investment banks,
and Islamic banks, is the primary mobiliser of funds and the main source
of financing to support economic activities in Malaysia. The non-bank
financial intermediaries, comprising development financial institutions,
provident and pension funds insurance companies, and takaful
operators, complement the banking institutions in mobilising savings
and meeting the financial needs of the economy.
1.1 The Central Bank
Bank Negara Malaysia (the Bank), the Central Bank, is the apex of the
monetary and banking structure of the country. Its main objectives as
defined in the Central Bank of Malaysia Act 1958 are to:
Issue currency and keep the reserves safeguarding the value of the
currency;
Act as a banker and financial adviser to the Government;
Promote monetary stability and a sound financial structure;
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 the advantage of
Malaysia; and
Influence the credit situation to the advantage of Malaysia.
To meet its objectives, the Bank is vested with legal powers under
various laws to regulate and supervise the banking institutions and other
non-bank financial intermediaries. The Bank also administers the
country's foreign exchange control regulations and act as the lender last
resort to the banking system.
1.2 Financial Institutions
The following table provides and overview of the number of financial
institutions as at end-September 2008:

Financial Institution

Total

Malaysian Controlled
Institutions

Foreign Controlled
Institutions

Commercial Banks

22

13

Investment Banks/ Merchant

Banks

15

15

Islamic Banks*

15

10

International Islamic Banks

Insurers

41

25

16

Islamic Insurers (takaful

operators)

International Takaful Operators) 1

Reinsurers

Islamic reinsurers (retakaful

operators)

Development financial
institutions

13

13

*Includes one foreign Islamic bank that commenced operations in

October 2008
Banks, including Islamic banks, operate through a network of more than
2,200 branches across the country. Six Malaysian banking groups have
presence in 18 countries through branches, representative offices,
subsidiaries and joint ventures. There are also 21 foreign banks which
maintain representative offices in Malaysia. They do not conduct normal
banking business but provide liaison services and facilitate information
exchange between business interests in Malaysia and their counterparts.
The introduction of the framework for investment banks in 2005
provided for the development of full-fledged investment banks through
consolidation and rationalisation between merchant banks, stockbroking

companies and discount houses. Investment banking activities mainly

include capital raising activities such as underwriting, loans syndication
and corporate financing, management advisory services, arranging for
the issue and listing of shares, as well as investment portfolio
management. The development of investment banks will enhance the
capacity of financial institutions in Malaysia to better serve its corporate
customers through a wider range of financial and advisory activities on
par with the services provided by international investment banks.
Malaysia also has a comprehensive Islamic banking system. Presently,
Malaysia has fifteen full-fledged Islamic banks, three of which are from
the Middle East, providing a broad spectrum of financial products and
services based on Shariah principles. At the same time, there are five
conventional banks three of which are major foreign banks, offering
Islamic banking products and services via the Islamic banking window set
up.
The entry of the three foreign Islamic banks enhances the competition
and stimulates innovation among the Islamic banking players, and at the
same time complements the Malaysian players in tapping into strategic
growth areas such as investment banking and wealth management. In
addition, these institutions also have plans to make Malaysia as their
financial hub for this region.
In terms of product offering, more than 60 Islamic financial products and
services are made available in the market. The emergence of new
innovative products and financial instruments that incorporate globally
accepted Shariah principles such as commodity murabahah deposits,
Islamic profit rate swap, musyarakah mutanaqisah home financing and
sukuk musyarakah in the industry have further elevated the domestic
Islamic financial sector to the next stage of advancement.
Malaysia has several development financial institutions (DFIs) that were
set up with specific objectives to develop and promote strategic
economic sectors, including the manufacturing and export sectors, small
and medium enterprises (SMEs), as well as the agriculture, infrastructure
and maritime sectors. These DFIs complement the banking institutions
by providing an array of financial and non-financial services to support
development of the strategic sectors. These include the provision of
medium to long-term loans, equity capital, guarantees for loans and a

range of supplementary financial and business advisory services. Bank

Perusahaan Kecil & Sederhana Malaysia Berhad' or the SME Bank, which
was established in October 2005, offers financial products such as term
loans and working capital including start-ups and SMEs in new growth
areas, particularly to those in professional services, export-oriented
activities and franchise businesses. Bank Pertanian Malaysia has recently
been corporatised to Bank Pertanian Malaysia Berhad (Agrobank) in
order to strengthen its role to be more effective in meeting the needs of
the entire value chain of agricultural activities, including the agro-based
industries.
1.3 Malaysia as an International Islamic Financial Centre
Malaysia's continuous efforts in strengthening the Islamic financial
system domestically and internationally have gained acceptance and
recognition by the international financial fraternity. An important
initiative that has been introduced is to enhance the position of Malaysia
as a leading international Islamic financial hub.
On August 2006, the Malaysian Government launched the Malaysia
International Financial Centre (MIFC) initiatives. The MIFC initiative is a
collaborative effort formed by Malaysia's financial and market regulators
together with top officials from relevant Government agencies and
participants from the banking, takaful and capital market sectors. The
establishment of the MIFC as one of the key intermediation linkages in
the global market place, has an important role in accelerating the
process bridging and strengthening the relationship between
international Islamic financial markets and thereby expand the
investment and trade relations between the Middle East , West Asia and
North Africa with East Asia . Situated centrally in the Asian time zone,
Malaysia presents itself as a meeting place for those with surplus funds
and those who seek to raise funds from any part of the world.
Under the MIFC initiatives, Malaysia offers strong value propositions as a
key provider of Islamic financial services, with five focus areas:

A platform for sukuk origination, distribution and trading.

A destination for financial investment with a wide range of world class

capital market and treasury instruments.

A centre for the establishment of Islamic banks providing international

currency financial services.
tional Takaful
A centre for international takaful and retakaful businesses.

A centre of excellence and thought leadership in education, training,

consultancy and research in Islamic finance to create a supply of talent
for the Islamic finance industry.
Major incentives introduced to attract more participants to MIFC
include:
Issuance of new International Islamic Banking (IIB) licences under the Islamic
Banking Act 1983 to qualified foreign and Malaysian financial institutions to
conduct the full range of Islamic banking business with residents and nonresidents in international currencies either as a subsidiary or a branch. The
entity will enjoy full income tax exemption for ten years up to year
assessment 2016 under the Income Tax Act 1967.
Issuance of new International Takaful Operator (ITO) licences to qualified
foreign and Malaysian financial institutions to conduct full range of takaful
business with non-residents and residents in international currencies, either
as a subsidiary or a branch. The entity will enjoy similar income tax
exemption as the IIB entity.
Islamic fund management companies (IFMC) are allowed to invest all their
Shariah funds abroad. The entity will enjoy tax exemption on all fees for
managing Islamic funds for foreign and Malaysian investors up to year of
assessment 2016 under the Income Tax Act 1967.

Provision of start-up fund by Employees Provident Fund (EPF) for the

establishment of foreign IFMC.

Up to 100% foreign equity ownership is allowed for IIB, ITO and