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Topic 2:

Bank Negara Malaysia

and the financial system

MFK FIN536 Topic 2 1

At the end of the lessons, students should be
able to:-
 Identify the objectives of BNM.

 Explain the functions of BNM.

 Explain the various forms of financial regulation

in Malaysia.

MFK FIN536 Topic 2 2

i. To issue currency and keep reserves while
safeguarding the value of the currency.

ii. To act as a banker and financial adviser or

agent to the Government.

iii. Supervision and examination.

iv. Lender of last resort.

v. Currency distribution.

vi. Ensuring monetary stability

MFK FIN536 Topic 2 3
 Sole issuer to issue currency in the country.

 Safeguarding the currency value – to maintain

the public and other countries towards the value
of the Malaysia Ringgit.

 Reserves consists of:-

◦ Gold,
◦ Foreign exchange,
◦ Reserve position with International Monetary Fund
◦ Holdings of Special Drawing Rights

MFK FIN536 Topic 2 4

 Managing government account.

 Obtaining loans for government.

 Managing the government public debt.

MFK FIN536 Topic 2 5

 Acting as Banker to other banks - all banks must
have account with BNM.

 Licensing of bank and other banking institutions.

 Inspection of banks.
◦ Increase public confidence.
◦ Sound banking practice.
◦ Bankruptcy of the banks

MFK FIN536 Topic 2 6

 Lender of last resort to financial institutions.

MFK FIN536 Topic 2 7

 Sole authority – distribute paper money and coins
to meet the demands of banks.

MFK FIN536 Topic 2 8

 Stabilization package.

 Economic recovery package.

MFK FIN536 Topic 2 9

Regulation of financial

MFK FIN536 Topic 2 10

 Central Bank of Malaysia Act 1958.

 Banking and Financial Institutions Act 1989.

 Insurance Act 1963.

 Islamic Banking Act 1983

 Takaful Act 1984

MFK FIN536 Topic 2 11

 Licensing
◦ Business to be carried on only under license.
◦ Vetting and recommendations by ban, grant or refusal
by Minister.
◦ Revocation of license.
◦ Impositions of restrictions.

 Deposit-taking to be under license.

 Advertisement

MFK FIN536 Topic 2 12

 Branches and subsidiaries.

 Minimum Capital Funds/New Working Funds


 Ownership, control and management of licensed


 Power of investigations, search and seizure.

 Penalty.

MFK FIN536 Topic 2 13

 Instruments of policy
◦ Statutory Reserve Requirements (SRR) – Sec. 37(1) .

 Liquidity requirements.

 Ratios.

 Money Market Operations

MFK FIN536 Topic 2 14

i. Open market operations
 Involves the purchase and sale of Government
papers – to affect the reserves of banks and
thereby the flow of bank credit and money.

MFK FIN536 Topic 2 15

ii. Direct borrowing or lending
 Use by the Bank in the day-to-day management
of reserves to smoothen the seasonal
fluctuations in liquidity.

 Discount operations.
 Limit on swap transaction with foreign
 Interest rate regulation.
 Credit control and guidelines on lending
 Moral suasion
MFK FIN536 Topic 2 16
 Use to influence interest rate and liquidity
situation via variations in the terms and
conditions under which the commercial bank and
money market have temporary access to Central
bank credit facilities.

MFK FIN536 Topic 2 17

 Commercial banks were discouraged from
placing funds abroad.
 Funds mobilized internally by the commercial

banks were channeled for the financing of

domestic economic activities.

MFK FIN536 Topic 2 18

 Instrument use by Central Bank to influence the bank
liquidity and availability ad cost of bank credit.

 To influence the level of saving and the maturity structure of

these savings.

 To promote growth of genuine banks by limiting rate of


 To protect the balance of payments from being significantly

affected by capital movements arising from interest rate
differentials between Malaysia and the rest of the world.

MFK FIN536 Topic 2 19

 Introduced only under compelling circumstances
and for limited period.

 Example:-
◦ Credit card @ minimum income of RM24,000 p.a.

MFK FIN536 Topic 2 20

 A Central Bank techniques of informally inducing
a voluntary response from the financial system to
its policy initiatives.

 Example:-
◦ Limit lending secured by shares to protect the banking
system form over exposure to the volatility of the stock
◦ Merger and acquisition.
◦ Islamic banking subsidiary of Commercial Bank.

MFK FIN536 Topic 2 21

At the end of the lessons, students should be
able to:-
 Identify the objectives of BNM.

 Explain the functions of BNM.

 Explain the various forms of financial regulation

in Malaysia.

MFK FIN536 Topic 2 22

 Different ways of charging interest.
 Interest rates determinations.
 Money and foreign exchange market.

MFK FIN536 Topic 2 23


MFK FIN536 Topic 2 24

 Discuss about detail of the monetary
instrument tools and its impact.
 Answer individually, marks given if answer

correctly, this is considered individual

participation in the class
 Purpose: to train you to speak something

relevant to subject matter

MFK FIN536 Topic 2 25