THE BANKING SYSTEM IN MALAYSIA

The banking system, comprising commercial banks, investment banks, merchant 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, takaful operators and saving institutions, complement the banking institutions in mobilising savings and meeting the financial needs of the economy.

1. The Central Bank

Bank Negara Malaysia (BNM), the Central Bank, is the apex of the monetary and banking structure of the country. Its main objectives as defined in the Central Banking 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 national stability and a sound financial structure; and
• Influence the credit situation to the advantage of Malaysia.
To meet its objectives, BNM is vested with legal powers under various laws to regulate and supervise the banking system and other non-bank financial intermediaries. BNM also administers the country's foreign exchange control regulations and act as the lender last resort to the banking system.

2. Financial Institutions

The following table provides and overview of the number of financial institutions as at end of 2007:

Total Malaysian-Controlled Foreign-Controlled
Commercial Banks 22 9 13
Investment Banks/Merchant Banks 14 14 -
Islamic Banks 11 8 3
Insurers 41 27 14
Islamic Insurers (takaful) 9 9 -
Reinsurers 7 3 4
Islamic Insurers (retakaful) 2 - 2
Development Financial Institution 11 11 -

Banks, including Islamic banks, operate through a network of more than 2,100 branches across the country. Six Malaysian banking groups have presence in 19 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 2006 provides for the development of full-fledged investment banks through the mergers between merchant banks, stock broking 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. At present, Malaysia has eleven full-fledged Islamic banks which provide a broad spectrum of financial products and services based on Shariah principles, including three Islamic banks from Middle Eastern countries. Seven conventional banks including four major foreign banks also offer Islamic banking products and services via the Islamic banking window set up.

The presence of three foreign Islamic banks enhance the competition and stimulate innovation among the Islamic banking players, and at the same time complement 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 via branches nationwide. The emergence of new innovative products and financial instruments with more 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 dan Sederhana Malaysia Berhad' or the SME Bank, which was established in October 2005 offers financial products such as term loans, working capital and start-up financing to SMEs in all economic sectors. SMEs could also avail themselves to ancillary services provided by the advisory centre of SME Bank for consultation and advice on marketing, business development, operations and customer service. Two new trade finance products, namely, the ‘Multi Currency Trade Finance', and ‘Indirect Exporter Financing Scheme', are currently available at Export-Import Bank of Malaysia Berhad to support export of goods and services by small and medium business to non-traditional markets, especially the member countries of the Organisation of Islamic Conference.

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 centre. In the middle 2006, the Malaysian Government launched the Malaysia International Financial Centre (MIFC) initiatives. 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 is well positioned to effectively serve the East Asian region.

Under the MIFC initiatives, Malaysia offers a niche as a provider of Islamic financial services, namely:

- a platform for origination, distribution and trading of Islamic capital market and treasury instruments including sukuks;
- an Islamic investment gateway to Asia with a niche in Islamic fund and wealth management;
- International currency Islamic financial services (including deposits and financing); and
- a centre for takaful and retakaful businesses.

Malaysia is also positioning itself as a centre for excellence for Islamic banking and finance education, training, consultancy and research to complement the industry players with the supply of skilled and competent talents in Islamic banking and finance. Malaysia is offering its expertise to financial regulators in providing technical assistance as well as sharing experience in relevant areas mainly on the regulation and supervision of Islamic finance.

Major incentives introduced to attract more players to MIFC include the following:

- Issuance of new licences under the Islamic Banking Act 1983 to qualified foreign and Malaysian financial institutions to conduct the full range of Islamic banking business with non-residents and residents in international currencies either as a subsidiary or a branch. The entity will be eligible for full income tax exemption for a period of ten years under the Income Tax Act 1967 for the year of assessment 2007.

- Issuance of new registrations 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 be eligible for similar income tax exemption as that granted to the new banking entity.

- Provision of greater flexibility to the Labuan offshore Islamic banks, offshore Islamic Investment Banks, offshore takaful companies and Islamic division of offshore banks and offshore insurance companies in their business operations by allowing the opening of operation offices anywhere in Malaysia without having the need to maintain physical presence in Labuan .

- Islamic fund management companies will be allowed to be wholly owned by foreigners and invest all their assets abroad.

- Local and foreign companies managing approved Islamic funds of foreign investors are given income tax exemption on management fees received from the year of assessment 2008 until year of assessment 2016.