Global financial crisis or rather known as the Great Recession was started off in the United

States then spread throughout the world. Economists and financial experts claimed that subprime
lending is the leading cause of the global financial crisis that happened in the year of 2007 until
year 2009. One of the consequences of the crisis was total collapse of large financial institutions
in United States, in which causing major slumps in stocks market around the world including
Malaysia. During the financial crisis, Malaysian capital market, the financial system, and the
economy were negatively affected.
Asian economies including Malaysia were impacted by the international crisis during the second
half of 2008 until the first quarter of 2009. Malaysia suffered capital flight due to a reduction in
international business by the banks and financial institutions in United States and European
countries during the critical period. The capital flows of Malaysia was the first hit by the crisis
and the country recorded its biggest slump in net capital flow of negative RM 118.5 billion in
2008 (Khoon & Mah-Hui, 2010); and portfolio investment is accounted for the significant losses
of these flows (Bank Negara Malaysia, 2010). The global deleveraging process in the advanced
economies, especially in the United States, was the main cause of such massive decline in
Malaysia net capital flows.
Of these capital flows, Malaysias portfolio investment was affected the most as massive foreign
funds were remitted back to the United States. After the major financial institutions in United
States had collapsed, many foreign investors liquidated their portfolio funds in the Malaysian
stock market to cover their losses in U.S. and some European countries (Bank Negara Malaysia,
2010). Throughout the year of 2008, Malaysias portfolio investment was the most volatile and
such reversal in portfolio funds by foreign investors had caused a significant shrunk in the capital
market, namely stock market and bond market. Annual report provided by Bank Negara
Malaysia (2010) also showed that of this portfolio flows, equity securities fluctuated the most
and recorded a substantial loss of approximately RM 55 billion.
Angabini & Wasiuzzaman (2011) claimed that the sudden extract of massive foreign funds in the
Asia and the deterioration in investor sentiment were the causes of a big slump in Bursa
Malaysia. KLCI was subjected to significant volatility during the crisis period as global investors

lose confidence in the stock market performance due to uncertainty in the future growth of the
financial market. Malaysia stock price has dropped significantly as Bursa Malaysia recorded a
sharp decline in KLCI and market valuation. The Malaysian equity market has fallen drastically
from 1445.0 index point in 2007 to 876.8 index points in 2008; and the market valuation has
shrunk by RM 442.4 billion within these particular years (Bursa Malaysia, 2009). In addition,
statistics provided by Bursa Malaysia (2009) also showed that in 2008, Malaysian securities
market and equities market suffered a decline of 46% and 43% respectively in the daily average
trading value, whereas equities trading revenue has dropped by 54% due to investor sentiment .
The overall performance of Malaysian capital market was negatively affected by a fall of 27%.
Despite the massive capital outflow and high volatility in the equity market, the credit crisis 2008
has affected Malaysia much lesser than other Asian countries. This is mainly due to the
macroeconomic measures taken by the government in restoring the financial sector, as well as
the stability and healthiness of the banking sector. Moreover, the domestic financial institutions
and markets had less exposure to toxic financial assets compared to other Asian countries (Basir,
2009). Nonetheless, the systematic risks in the financial sector should not be disregarded given
the Malaysias high level of openness in both financial and economic sector.