FIN250

Learning Outline:

2.1 Principal objective of BNM

2.2 Principal functions of BNM

2.3 Sources and uses of funds for BNM

2.4 Monetary policy operations

2.5 Functions of BNM to Promote Financial

Stability
Learning Outcomes:
Upon completion of this topic, student should be
able to:

2.1 Describe the principal objective of BNM

2.2 Describe the principal functions of BNM

2.3 State the sources and uses of funds for

BNM

2.4 Explain the monetary policy operations

2.5 Discuss the functions of BNM to promote

financial stability
2.0 Background of Bank Negara Malaysia
(BNM)
 Background of Bank Negara
Malaysia (BNM)
Establishment
26th January 1959

Governed by
Central Bank of
Malaysia Act 2009

Purpose
Provides administration, objective, functions and
powers of the Bank
2.1 Principal Objectives of Bank Negara
Malaysia (BNM)
 Principal Objectives of BNM

1. To promote monetary stability and financial stability conducive to the sustainable

growth of the Malaysian economy.

2. To carries out its principal functions. These include issuing currency, and holding
and managing the country’s foreign reserves. The Bank is also the financial adviser,
banker and financial agent of the Government.

3. To have all the power necessary, incidential or ancillary to give effect to its objects
and carry out its functions.

4. To give effect to its objects and carry out its functions under this Act shall have
regard to the national interest.
Central Bank of Malaysia Act (2009)
2.2 Principal Functions of Bank Negara
Malaysia (BNM)
2.2 Principal Functions of BNM
Monetary policy:
a To promote and conduct monetary policy in Malaysia

Issue currency:
b To issue currency in Malaysia

c
Regulate financial institutions:
To regulate and supervise financial institution which are
subject to the laws enforced by the bank
 2.1 Principal Functions of BNM
Oversight money and foreign exchange
market:
To provide oversight over money and foreign markets
d

Oversight payment system:

To exercise oversight over payment systems
e
S
To promote a sound financial system:
To promote a sound, progressive and inclusive financial
system
f
 2.2 Principal Functions of BNM

g
Manage foreign reserves:
To hold and manage the foreign reserves of Malaysia.

Pomote exchange rate:

h
To promote exchange rate regime consistent
with the fundamentals of the economy

Financial advisor, banker and financial

agent of the Government:
To act as financial advisor, banker and financial agent of the
Government. i
2.2 Explanation on the Principal Functions
of Bank Negara Malaysia (BNM)
 Function 1: To promote and conduct
monetary policy in Malaysia
• BNM conduct monetary policy operations to promote the monetary stability.
• Monetary policy operations refer to any operation undertaken by BNM to
manage liquidity in the financial system (CBA, 2009).
• Monetary policy operation will be used to control the level of interest rates on
short term borrowings and deposits in order to manage the liquidity situations.
• Types of monetary policy tools:
Quantitative measures such as:
i. Statutory Reserves Requirement (SRR)
ii. Liquidity Requirement (LR)
iii. Money Market Operations (MMO)
Qualitative measures such as:
i. Interest rate ceiling
ii. Selected credit control
iii. Moral Suasion
$
 F u n c t i o n 2 : To i s s u e
Picture 2: Money issued by BNM
currency in Malaysia
• The BNM started to issue its
own currency on JUNE 12, 1967.
• The abbreviated form of the
ringgit shall be “RM” or “MYR”.
• Only currency notes and coins
issued by BNM shall be legal
tender in Malaysia.
• The bank shall be the sole
authority to issue currency and
coins in Malaysia and such notes
and coins shall only be printed or
minted by or under the authority
of the bank.
 Function 3: To regulate and supervise financial
institutions which are subject to the laws enforced
by the bank Legislative powers:
BNM is empowered to act as a
Reasons for co-operation with financial institution:
regulator of banking institutions
ot e and
T o p rom g and
under the:
a ) ban k i n
a i nt a i n for the i. Central Bank of Malaysia Act
m er vice s (2009)
i a l s
financ ii. Financial Services Act (2013)
public iii. Islamic Financial Services Act
(2013)
iv. D e v e l o p m e n t F i n a n c i a l
b) To fo Institutions Act (2002)
ster hig
of bank h stand v. Anti-Money Laundering, Anti-
ing and ards
Malaysi finance Te r r o r i s m F i n a n c i n g a n d
a in Proceeds of Unlawful
Activities Act (2001)
vi. Currency Act 2020
vii. Money Services Business Act
(2011)
 Function 4: To provide oversight over money and
foreign exchange markets
• BNM may issue rules, codes, standards, principles or guidelines of
the money market and foreign exchange market.
• The purpose is to regulate, develop, or maintain integrity of the
money market and foreign exchange market related to the currencies,
securities and other financial instruments traded in these markets.
P Function 5:To exercise oversight over payment
systems
• Payment system refer to any system or arrangements for the transfer, clearing
or settlement of funds or securities.
• The roles of BNM as the overseer of payment systems are:
i. To ensure the safety, reliability, and efficiency of payment systems
infrastructure
ii. To conducts oversight on both large value and retail payment systems.
iii. To reducing the overall risks in the payment systems.
iv. To facilitates improvements in payment services and market developments.
Function 6: To promote a sound, progressive and
inclusive financial system
• The financial system plays a critical role in the economy.
• Financial system:
i. enables the financial intermediation process which facilitates the flow of
funds between savers and borrowers.
ii. ensure financial resources are allocated efficiently towards promoting
economic growth and development.
• Financial stability is a condition where the financial intermediation process
functions smoothly and there is confidence in the operation of key financial
institutions and markets within the economy.
K Function 7: To keep and manage the foreign
reserve of Malaysia
• BNM shall hold and manage the foreign reserves in acordance with the
policies and guidelines established.
• Foreign reserves consist of gold, foreign currency, financial securities, bills
of exchange and other securities.
• The reasons BNM keeping foreign reserves:

a) To carry out BNM functions and maintaining public confidence.

b) To safeguard the external value of ringgit, BNM shall maintain

minimum external reserves of 80.59% against the currency issue.
 Function 8: To promote exchange rate regime
consistent with the fundamentals of the economy
• The exchange rate regime (floating, fixed, or pegged) for the ringgit
shall be determined by the Ministry of Finance on the
recommendation of the BNM.
• BNM shall conduct foreign exchange operations for the efficient and
effective functioning of the exchange rate regime and the foreign
exchange market.
Function 9: To act as financial advisor, banker
and financial agent of government
a) Manage Government accounts
• BNM keep account of Government moneys that

1
is received and disbursed.

2
• aundertake the issue and management of
s e c u r i t i e s , Tr e a s u r y b i l l s i s s u e d b y t h e
government.
b) Temporary financing to Government
• BNM provides temporary financing to the
Government to cover temporary deficiencies of
budget revenue.
• All financing shall be payable not more than 3
months after the end of the financial year.

3
c) Advise for Government
• To advise or enquiry into any matter affecting
monetary, financial, banking or currency matters in
Malaysia or outside Malaysia.
2.3 Sources and Uses of Funds for Bank
Negara Malaysia (BNM)
 Sources and Uses of Fund for BNM

Capital Deposits with other

financial institutions
Reserve
Profit Loans and advances (Banking and
Demand deposit financial institutions, public sectors,
private sector and
Other deposit from financial foreigners)commercial banks
institution, public and private sector,
foreign Securities (treasury bills, commercial
bills and Malaysian government
Borrowings securities
Funds from financial institution Gold & Forex reserve
such as Insurance, provident and
pension fund USES Other assets

Other liabilities
SOURCES
2.4 Monetary Policy Operations
Monetary Policy Operations

• Monetary policy operations refer to any operation undertaken by BNM to manage

liquidity in the financial system (CBA, 2009).
• BNM is responsible to (i) promote monetary stability and a sound financial structure,
and (ii) manage the banking system.
• In promoting monetary stability, BNM will control the level of interest rates on short
term borrowings and deposits in order to manage the liquidity situations through 2
measures:
Quantitative measures such as:
i. Statutory Reserves Requirement (SRR)
ii. Liquidity Requirement (LR)
iii. Money Market Operations (MMO)
Qualitative measures such as:
i. Interest rate ceiling
ii. Selected credit control
iii. Moral Suasion
 iii) Money Market
ii) Liquidity Requirement
Operations
(SLR)

i) Statutory Reserve
Requirement (SRR) Quantitative
Measures
 SRR is a monetary policy instrument for liquidity management and
hence credit creation in the banking system.

Banking institutions namely commercial banks, investment banks and

Isamic banks are required to maintain a certain percentage of their
i. Statutory eligible liabilities with BNM as reserves (under Section 37 (1)) .

Reserve The eligible liabilities (EL) comprise of deposits including Negotiable

Instruments of Deposit (NIDs) and repurchase agreement (REPOs))
Requirement and net interbank borrowings.

(SRR) If the financial system is seen to have excess liquidity (fund), BNM will
increase the SRR rate for the banking system to keep more money
(EL) with BNM in order to reduce lending activity to control inflation.
If the financial system is seen to have lack of liquidity (fund), BNM will
reduce the SRR rate for the banking system to keep less money (EL)
with BNM in order to increae the lending activity for various
economic and business activities.

SRR does not yield returns.

Statutory Reserve Requirement (SRR)
 Refer to requirement for banking institutions to keep a minimum
percentage of liquid assets which are kept in the banks and yield
returns. (under Section 38(1)) .

An increase in LR requires banking institutions to keep more

liquidity in the banks and therefore reduce lending ability

ii. Liquidity
A decrease in LR requires banking institutions to keep less liquidity
Requirement (LR) and therefore increase lending ability

The importance of LR are:

• to ensure that the banks always maintain liquid assets at all times
• to safeguard the interests of the depositors
• to be used for credit creation
• to be used as a means to ensure continuous and ready financing for the government’s
development projects.
• as a monetary policy operation to influence the liquidity situation

Liquid assets include:

• Cash • Government investment certificates

• Clearing balances with BNM • Cagamas Bonds
• Bill discounted or purchased
• Money at call • Bank Negara Bills
• Treasury Bills • BNM certificate
• Government securities • State Government securities
Liquidity Requirement (LR)
 • MMO is another monetary tools to manage the
credit situation in the financial system.
• MMO done thru two (2) ways;
i. Direct borrowing and lending.
ii. Buying and selling of government securities.
• This monetary operation directly affects the
iii. Money reserve of banks and therefore their lending activity.
• During tight monetary policy, BNM sells the
Market government securities to banking institution in
order to reduce their reserves for lending ability.
Operations BNM can also ouright borrowing from Banking
institutions in order to reduce their reserves for
(MMO) lending ability
• During easy monetary policy, BNM purchases the
government securities from banking institutions in
order to increase their reserves for lending ability.
BNM can also ouright lending to Banking institutions in
order to increase their reserves for lending ability
Money Market Operations (MMO)
 iii) Moral Suasion
ii) Selected Credit Control

i) Base Rate
Qualitative
Measures
i. BASE RATE
• The base rate refers to main reference rate for retail loans.
• With base rate, banks in Malaysia can determine their
interest rate based on a formula set by the central bank.
• Base rate is decided in order to enhance transparency in
the credit market and ensure that banks pass on the
lower cost of fund to their customers.
• Loan pricing will be done by adding base rate and a
suitable spread depending on the credit risk premium.
• Lending rates = Base rate + Specific interest rate of
borrwers.
• If a BNM increases the base rate, commercial banks will
increase their interest rates and borrowing becomes more
expensive and vice versa.
ii. SELECTED CREDIT CONTROL

• Refer to credit control by the central bank thru regulation

of credit.
• This method is used in regulating the volume and
direction of credit.
• If BNM loosen the law on credit, it will increase the
lending activity of banking institution
• If BNM tighten the law on credit, it will decrease the
lending activity of banking institution.
• For xample: Guidelines credit card operations in which
ony 21 years old minimum age to apply.
 A traditional technique used by BNM to induce a
voluntary response from the financial institutions to
fullfill its policy initiatives.

iii. Moral BNM conduct inspection/ audit/ meetings with the

Suasion financial institutions to ensure they follow to its

policy initiatives.

For example:
i. Discouraging financial institutions to lend
excessively for speculative activities.
ii. Encourage more financingfor the Bumiputra small
borrowers.
2.5 Functions of BNM to Promote
Financial Stability
Financial Stability
• Financial stability is a condition where the financial intermediation process functions
smoothly and there is confidence in the operation of key financial institutions and
markets within the economy.
• Financial instability may lead to a financial crisis. Thus, it is important to have a
sound, stable and healthy financial system.
• One of the main objectives of central banks is to promote and maintain monetary
and financial stability as it contributes to a healthy economy and sustainable growth.
• BNM promotes a sound and efficient Malaysian financial system by:
i. Preserving the soundness of financial institutions - by regulating and supervising
all licensed financial institutions.
ii. Preserving the robustness of the financial infrastructure - ensure reliable major
payment and settlemet system.
iii. Preventing disruptions to the intermediation process
iv. Maintaining confidence in the financial system - ensure efficiency in the money,
foreign exchange, capital and derivatives market.
 END OF
CHAPTER 2
Study Questions:

1. State any two (2) sources and two (2) uses of funds for BNM.
2. Describe any two (2) principal objectives of BNM.
3. Explain the functions of BNM as financial advisor, banker and financial agent
of government.
4. Give any one (1) difference between quantitative and qualitative measures for
monetary policy operations.
5. Provide any two (2) function of BNM in promoting the financial stability.
List of References:

1. Legal Research Board, Central Bank of Malaysia Act 2009 (Act 701) And Order,
International Law Book Services, 2013, ISBN: n/a
2. Ibrahim Abdul Rahman & Siti Norbaya Mohd Rashid, Financial Market and
Banking Operations.
3. Bank Negara Malaysia website (www.bnm.gov.my)