ASIA PACIFIC UNIVERSITY OF TECHNOLOGY AND INFORMATION - CFIN ASSIGNMENT

1.0 INTRODUCTION 2

2.0 Malaysian Banking System 3

2.1 Roles of Central Bank ( Bank Negara ) 4
2.2 Objectives for Bank Negara 6

3.0 Evaluation of success and failure of the merger 6

4.0 Future Implication of The Merger 10

5.0 References 12
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1.0 INTRODUCTION

Banking, in general, is defined as an institution that deals with funds and their alternatives and
offers other financial services. Banks accept deposits and offer loans and benefit from the
difference between interest rates paid and bills respectively (Garden, Finance, and ATMs, 2018).
Banks create money in the economy by offering loans. The amount of money that banks can lend
directly to Fed reserve requirements is affected. The reserve currently accounts for between 3%
and 10% of the Bank's total deposits (Yadhuvanshi, 2018). Furthermore, the definition of
according to (Sharma, 2018) "Banking" has been defined as "accepting of landing and
investment, of deposit of money of the public, repayable on demand order or otherwise and
withdrawable by cheque, draft, or otherwise". Meaning that every business transaction that with
a bank like depositing, withdrawing funds, or requesting a loan is considered a banking activity
(Sharma, 2018).

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Source Figure 1 : https://leaderonomics.com/functional/the-financial-system-in-malaysia

All these very different functions can basically be provided by banks or other financial
institutions or directly on the capital market. Banks and other financial intermediaries exist
because they are an effective response to the fact that information is expensive. Banks specialize
in the credit check of borrowers and provide a continuous monitoring function to ensure that
borrowers or clients meet their obligations. They are rewarded for these services by the
discrepancy between the interest rates they offer to the accumulated savers and the interest rates
they offer potential borrowers. This process is known as the Maternity Transformation and is at
the heart of modern banking. Banks offer a savings deposit and convert it into long-term
(illiquid) assets - private loans and business loans. In addition, banks play a role in providing
payment and settlement services to households, businesses and other financial institutions to
manage their ongoing transactions (hunt, 2018).

2.0 Malaysian Banking System

Malaysia's financial system has begun to become smaller through consolidation and
organizational development. This evolution began when the government took action to enable
the Malaysia economy to deal with the regional financial crisis in the middle of 1997. Central
Bank, Bank of Malaysia (BNM), manages Malaysia's economic corporation by the successful
merger of the 10 anchors, completed in 2002. The government encourages further merger on the
local bank to ensure competition in the world economy. Currently, there are eight cities in that
area, BNM licenses and manages business such as business banks, bank accounts, bank accounts
and cash flows (export.gov, 2018). The Malaysian banking system is the largest component of
their financial system, accounting for about 67% of the total asset of the financial system.
Malaysia banking system has experienced downturn while it began its bankruptcy in August
2006, when the International Islamic Financial Center of Malaysia (MIFC) was established and
the desire to become an Islamic Islamic leader. At the time, the government betrayed banks to
enter the Islamic market. In the end, this allows foreign Muslims to work in Malaysia. As of June
2017, there were 13 neighboring villages in Malaysia and other countries operating in Malaysia.

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Other financial assets in Malaysia may invest 100%. The economy in Islam depends on sharia
law, which prohibits payment of interest on the loan (export.gov, 2018).

In general, financial institutions of development finance institutions and non-bank insurance

companies are associated with banks to set up financing platforms. Reinsurance and insurance
companies carry out their general insurance and life insurance sector. The Malaysian
Development Financial Institution (DFI) is a specialized financial institution set up by the
Government with a unique means of promoting and developing the main areas considered
essential for achieving the country's socio-economic growth objective. These sectors include
SMEs, agriculture, the marine sector, export-oriented sectors and infrastructure, and technology-
intensive and capital-intensive enterprises. Moreover, The banking system, investment banks,
Islamic banking and comprising commercial banks is the primary foundation of finance which
support their economic activities in Malaysia. The Banking institutes run through a network of
2000 and more branches across Malaysia. In conclusion, the principal objective of the bank is to
financially stability and promote monetary this allow the sustainable growth of the economy in
Malaysia (export.gov, 2017).

2.1 Roles of Central Bank ( Bank Negara )

Bank Negara Malaysia plays its role as overseer in ensuring the safety, reliability, and efficiency
of payment systems infrastructure, and to safeguard the public's interest (bnm.gov.my, 2018). In
Malaysia, the role of the central bank has been delegated to Bank Negara Malaysia (BNM). Its
responsibility extends to the development of financial infrastructure and to participation in the
overall economic development of the nation. Today, Bank Negara Malaysia focuses on the three
pillars of the central banking system, such as monetary stability, financial stability, and the
payment system. In addition, Negara Malaysia's development role in economic management,
institutional construction and the development of the financial system is important (ukessays,
2015). Generally, the roles of Bank Negara Malaysia are; to promote monetary stability and a
sound financial structure, to act banker and financial advisor to the government, to issue currency
and keep reserves safeguarding the value of the currency, and to maintain the influence of the
credit situation to the advantage of the country (ukessays, 2015). As an overseer, Bank negara

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Malaysia (BNM) develops an organizational framework and oversees high value in retail
payment systems. Therefore, Bank Negara Malaysia also facilitates improved payments and
market development through payment instrument and payment systems. The Bank also conducts
active consultations and cooperation with market participants and stakeholders. Given the
importance of e-payments to improve economic efficiency, the acceleration of the transition to e-
payments is one of the nine focus areas of the 2011-2020 financial blueprint published by the
Bank in December 2011 (bnm.gov.my, 2018).

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2.2 Objectives for Bank Negara

Bank Negara Malaysia was established on 26th January 1959, under the central bank of Malaya
Ordinance in 1958. The essential objective of BNM are; to issue currency and keep reserved to
safeguard the value of the currency, to act as a banker and financial advisor to the government, to
promote monetary stability, a sound financial structure, and to influence the credit structure to
the advantage of Malaysia (ayunie, 2016). Broad Objectives of BNM is to participate to form a
part of the broader goals on national economic policy. In addition, the main objectives of the
national economic policy over the years are to promote a stable economic growth and to create
more employment opportunities also to stabilize the purchasing power of the Malaysian Ringgit
that lead to restructure the society and gradually upgrade the living standard, and, more
importantly, is to achieve a reasonable position in the country’s balance of payments
(Eichengreen, 2000). As the monetary authority of the country, the Bank Negara Malaysia is
responsible for maintenance monetary stability indicates the stability of the value of Malaysian
Ringgit. The best way to make sure the ringgit value is to guaranteed fixed price. In order to
ensure inflation in the country stay low and stable (ayunie, 2016).

Furthermore, the Bank implements monetary policy processes to manage the liquidity of the
financial system. The main objective of these transactions is to ensure that the interbank rate
(AOIR) on Ringgit in the interbank money market remains in the overnight interest rate corridor
(RPT) set by the MPC while ensuring effective performance of the Islamic financial market and
between Banks (bnm.gov.my, 2018). Moreover, the Central Bank is holds the role of keeping the
country’s official external reserves which a smaller amount is still held by the government. The
external reserves are normally held in the form of gold, reserves position in the International
Monetary Fund (IMF), special drawing rights, and a diversified portfolio of foreign exchange
assets denominated in major international currencies in the form of bank balances, treasury bills,
and long term securities (bnm.gov.my, 2018).

3.0 Evaluation of success and failure of the merger

● Competition level

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The combination of The four major Banks merger is designed to become larger. First, revenue
synergies from consolidation will be almost a parallel step, as analysts believe there will be little
difference in the combined loan portfolio, with the exception of auto loans and Islamic finance.
Cost savings will be high on the agenda, which means fewer branches and fewer staff. There will
likely be a large number of downsizing because the employees involved in every banks could be
larger than Malayan Banking Bhd (BNM, 2003). The merger, would result in creating a
sufficiently large and sufficient banking group. It will not be one of the three largest Malaysian
markets in Malaysia, but could be the big four. Whereas volume and size are important elements
in the banking sector. Although the big banks are working well and have large branches, many
competitors do not have a large number of branches in the region. A greater opportunity is a
better option for a larger part of the growing market. The success of the larger banks, the higher
market capitalization and the profits are very important for the BNM. For instance, high-level
banks are merging the first wide-industry consolidation process after the Asian financial crisis by
strengthening their own markets. This has led to the number of banking groups in Malaysia
shrinking from 11 to 8. However, a profitable process is very important to better understand the
market. Instead, the primary objectives and the unification process were created the banking
groups benefit from the synergies of income and costs that have arisen from this process. On the
contrary, the first goals and the consolidation process took place (Shidu, 2017).

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● Market Power

The impact of market power has increased significantly in all test models. This shows that
market power can lead to increased income efficiency. (Berger, 2009) also stated that more bank
market power improves in bank capitalization or in other words a bank in the more focused on
market that has the market power to establish higher price for their service and product related to
the bank in the lesser concentrated market. The fact that foreign development has attracted
international participation in Malaysia's Islamic banking sector, while internal development has
strengthened the market power of the local banking organization and finally act as the basis of
the decision of The Islamic banks to offered the operators of these organizations an opportunity
to manage their affairs free of charge. In theory, the increase in market power allows them to
grow in market concentration. However, since 2004, liberalization has stimulated the arrival of
De Novo international banks in the Islamic banking market in Malaysia (Mohamed, et al., 2015).
However, there is a competition theory that recommended that banks with commercial power
operating in a concentrated bank behave in a competitive manner in order to deter new potential
entrants (WJ, 1982).

The results showed that the difference between pre-merger and post-merger levels was
statistically insignificant. This shows that the level of affordability has not improved
significantly after the merger (Akhavein et al., 1997; Ariff & Can, 2008). However, the study found that
of the power of the market highlights the strength of the market in the banking market in a
situation of increased volatility (Berger, 2009). and it shows that more strength of the banking
market is improving in the capitalization of banks. In addition, their conclusions are
recommended as the strength of the high energy market increases nonperforming loans such as
those associated with a lower risk of bank failure. Due to the degree of capitalization in the
banks, the stability of the bank is not affected (Berger, 2009).

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● Efficiency level

The central bank of Malaysia (Bank Negara Malaysia) has supported the merger of banks. To get
their economies of scale and efficiency have produced a higher level of mergers between
commercial banks. In addition, the government called for stronger measures to encourage the
integration of the banking institution because of Asian financial crisis between 1997 and 1998.
Therefore, only nine commercial banks were there (Rasiah, 2014). This is a success, especially
for small and medium banks, which has resulted in many benefits from economic growth, and on
the other hand suggests that the bank must shrink to benefit from scale advantages. The
evaluation of the efficiency level plays an important role in regulating government regulations
and deregulation. The relationship of people must be willing to encourage mergers as a way to
gain valuable benefits. The motive behind this book is the first, in fact the changes in the
Malaysian oil market are changing and their importance is still found in other parts of the world.
As a conclusion, asset quality, capitalisation, market power and inflation are significant
determinants that have influenced the higher level of banks’ revenue efficiency in the periods of
pre and post-merger. Therefore, the unanticipated or anticipated inflation could significantly
affect performance of the banking sector (Perry, 1992).

● Productivity

In the banking sector, productivity traditionally has been considered important to the
development process, allowing banks to increase their competitiveness in term of enhancing
operational efficiency and become more innovative in developing competitively priced financial
products. Productivity of banking sector is important, because the banking sector is a major
supplier of intermediate services such as payment services and financing facilities to the
economy. Furthermore, much of the value chain of industries such as manufacturing and services
depend partly on the efficiency of the banking sector in providing intermediate services to them.
However, the results suggest that the mergers did not seem to enhance the productive efficiency
of the banks as they do not indicate any significant difference. The financial performance
suggests that the banks are becoming more focussed on their intermediation activities to generate
high net interest income. However, in Malaysia’s productivity index showing that due to their

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conservative loan loss reserve policies and cost inefficiencies after the merger, it has somehow
resulted in the loan growth and interest earning ratio variable giving a negative impact on ROE
(Kamarudin, 2014).

● Financial Stability

To be highlighted that the productivity index is generated under the assumption of fixed returns
on size. The fact that research found that the integration policy put in place by the government in
the late 1990s, as well as some support for the implementation of the financial master plan
(2001-2010). As a result of the merger, local banks were restructured. The bank's branches were
moved to ensure that potential markets were well-captured (Fadzlan, 2014). The Encouragement
of enhancing banks merger capacity should be a continuous process. By increasing capacity,
banks can operate on a larger scale. According to economic theory, operating on a large scale can
reduce costs, which can enhance the bank's competitive advantage. Easy access to the bank
through the latest technologies, such as online transactions, must be pursued. By reducing face-
to-face communication, transactions can be further improved. This can always put banks at a
higher level of efficiency and higher in levels (Usc.es, 2018).

4.0 Future Implication of The Merger

The government's decision to implement the merger did not fully integrate the Malaysian
banking system. Beyond the application of advanced technologies has changed the scope of
service operation and production of its operations in the economic market. Due to the changing
economic environment, Malaysian banks are facing a financial crisis. That is why it is important
to understand that changes in the banking market are due to an overly constitutional revolution.
The government's decision to implement the merger did not fully integrate the Malaysian
banking system. Beyond the application of advanced technologies has changed the scope of
service operation and production of its operations in the economic market (Mohammed, Ismail and
Muhammad, 2014). Malaysia is a developing country among all other countries. By looking at the
current situation, the merger of banks could transform the country's banking sector into a place
of globalization, which could boost the Malaysian currency. In the future, the merger and

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completion of banks could lead international investors to invest in Malaysia. AS study shows
that the merger of Hong Leong Bank and EON Bank builds a wider customer service and allows
them to conduct banking and financial transactions at any of the 329 branches and above 1,400
self service stations in Malaysia such as ATMs Automated checks and cash deposits (FINIAN
HUGH KEEN TSUM, 2013). Furthermore, the merging will improve the performance and expansion
and integration of banks will help improve Malaysia's economic development and support
innovation in Malaysia. For example, the merger between Hong Leung Bank and the Ionian
Bank has become a winning position for both parties and helps to challenge the new economy
and to follow the banking sector in the future (Ang, 2009). Merger in Malaysian banking system
has its own advantages and drawbacks, however the research shows that merger success index
has more improvement than the failures index for the fact that the merger plays significant role in
boosting productivity, efficiency, and the most important is the merger lead to reduces the risk
and at the same time it manage to bear out the market position and capital level. The
effectiveness levels of bank merger in Malaysia have led to an overall 95.5% , whereas a
minimum waste is at 4.1% only (Sufian, 2004). Moreover, Malaysian banks are very competitive
because of the low concentration of the market. A less important objective is preferable because
increasing concentration will reduce the supply of credit in the banking market and banks in an
increasingly market-oriented banking market that is more fragile than bankruptcy (Mohammed et
al., 2015). Finally, seeing overall results of all studies and research that had been done has lead to
the conclusion that the strategy of merging with local Malaysian banks were a good decision
taken by Bank Negara Malaysia to overcome the the Financial Crisis situation strucking the
Asian region between the year of 1997 to 1998 (Sufian, 2004).

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5.0 References

ABEL, S., 2018. THE HERALD. [Online]

Available at: https://www.herald.co.zw/role-of-banks-in-the-economy/

[Accessed 29 March 2018].

ayunie, n. (2016). Financial System In Malaysia. [online] Slideshare.net. Available at:

https://www.slideshare.net/natashyaayunie/financial-system-in-malaysia [Accessed 7
May 2018].

BNM (2003). [online]

http://www.insuranceinfo.com.my/_system/media/downloadables/bnm_eng.pdf.
Available at:
http://www.insuranceinfo.com.my/_system/media/downloadables/bnm_eng.pdf
[Accessed 12 May 2018].

bnm.gov.my, g. (2018). [online] Available at:

http://www.bnm.gov.my/index.php?ch=ps&pg=ps_mps_bnm&ac=175&lang=en
[Accessed 7 May 2018].

Eichengreen, B. (2000). Strengthening the International Financial Architecture: Where Do

We Stand?. Asean Economic Bulletin, 17(2), pp.175-192.

Enaud, R., 2018. investopedia. [Online]

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export.gov, e. (2018). Malaysia - Banking Systems | export.gov. [online] Export.gov.

Available at: https://www.export.gov/article?id=Malaysia-Banking-Systems [Accessed 7 May
2018].

Fadzlan, S. (2014). [online] Usc.es. Available at:

http://www.usc.es/economet/Journals3/ijaeqs/ijaeqs143.pdf [Accessed 11 May 2018].

Garden, H., Finance, P. and ATMs, B. (2018). How Banks Work. [online] HowStuffWorks.
Available at: https://money.howstuffworks.com/personal-finance/banking/bank2.htm
[Accessed 7 May 2018].

hunt, C. (2018). The role of banks in the economy - improving the performance of the New
Zealand banking system after the Global Financial Crisis - Reserve Bank of New

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Zealand. [online] Rbnz.govt.nz. Available at: https://www.rbnz.govt.nz/research-and-

publications/speeches/2011/speech2011-08-06 [Accessed 7 May 2018].

Kamarudin, F. (2014). [online] Pertanika.upm.edu.my. Available at:

http://www.pertanika.upm.edu.my/Pertanika%20PAPERS/JSSH%20Vol.%2022%20%
28S%29%20Dec.%202014/04%20JSSH%20Vol%2022%20%28S%29%20Dec%20201
4_pg55-76%20%28JSSH-1205-2014%29.pdf [Accessed 13 May 2018].

POZZOBON, D., 2012. my star job. [Online]

Available at:
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1114&sec=mystarjob_careerguide

[Accessed 14 april 2018].

Rasiah, D. (2014). International Journal of Economics and Finance;.

Sharma, N. (2018). Functions of banks. [online] Slideshare.net. Available at:

https://www.slideshare.net/nitu1200/functions-of-banks [Accessed 7 May 2018].

Shidu, s. (2017). Is bigger necessarily better? - Business News | The Star Online. [online]
Thestar.com.my. Available at: https://www.thestar.com.my/business/business-
news/2017/06/03/is-bigger-necessarily-better/ [Accessed 11 May 2018].

ukessays, u. (2015). The role of Bank Negara Malaysia. [online] UKEssays. Available at:
https://www.ukessays.com/essays/economics/the-role-of-bank-negara-malaysia-
economics-essay.php [Accessed 5 May 2018].

Usc.es. (2018). [online] Available at:

http://www.usc.es/economet/Journals3/ijaeqs/ijaeqs143.pdf [Accessed 11 May 2018].

Yadhuvanshi, N. (2018). [online] Available at: https://www.quora.com/How-do-banks-

function [Accessed 7 May 2018].

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