Assignment Fin430

1.
Describe and explain about the function of Central Bank of Malaysia AND any two
(2) of the non-bank financial institution at Malaysia.
The banking system consists of Bank Negara Malaysia (Central Bank of Malaysia),
banking institutions (commercial banks, finance companies, merchant banks and Islamic
banks) and a miscellaneous group (discount houses and representative offices of foreign
banks). Bank Negara Malaysia (the Central Bank of Malaysia) was established on 26
January 1959, under the Central Bank of Malaya Ordinance 1958.
The objectives of BNM are to issue currency and keep reserves to safeguard the
value of the currency, to act as a banker and financial adviser to the Government, to
promote monetary stability and a sound financial structure; and to influence the credit
situation to the advantage of Malaysia. The objectives of BNM, in essence, encapsulate
the importance of promoting economic growth with price stability and maintaining
monetary and financial stability. The introduction of the Banking and Financial
Institutions Act 1989 (BAFIA) on 1 October 1989 extended BNM’s powers for the
supervision and regulation of financial institutions and deposit-taking institutions who are
also engaged in the provision of finance and credit.
Non-Bank Financial Intermediaries (NBFIs) are important in that they form part of
the financial institutions that involved in the intermediation process in the financial
system. Intermediation is a process of efficient movement of funds from the surplus to the
deficits units. Their roles are very specialized such as promoting economic activities for
economic development, as in the case of a development finance institution; saving for
retirement (a pension fund), providing insurance business, supporting the extension of
home financing to the public by specific credit institution and increasing the habit of
investment and savings such unit trust and savings institution.
Two example for non-bank financial institution is provident and pension funds and
Development Financial Institutions. Provident and Pension Funds (PPFs) are a group of
financial schemes designed to provide members and their dependents with a measure of
social security in the form of retirement, medical, death or disability benefits. The major
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PPFs in Malaysia comprise the Employees Provident Fund (EPF), the Social Security
Organization (SOCSO), the Armed Forces Fund and the Teachers Provident Funds. The
PPFs funds serve as important mobilisers of long term savings in the economy for
rechanneling into both the public and private sectors to finance long-term investment.
The PPFs are the second largest group of financial institutions in the country in terms of
aggregate assets, next to banking institutions.
Development Financial Institutions (DFIs) are established by the Government to

promote the development of certain identified priority sectors and sub-sectors of the
economy, such as agriculture, infrastructure development and international trade. DFIs
generally specialize in the provision of medium and long term financing of projects that
may carry higher credit or market risk. It is envisaged that in the next decade, DFIs will
continue to progress and assume a more significant role in pursuing the Government
policy goals for strategic, social and economic development.
The following are the main DFIs in Malaysia such as Bank Pertanian Malaysia. The
main focus is in developing the agricultural sector of the country. It was established on
September 1, 1969 under an Act of Parliament and started operations in 1970. Another
DFI’s is Bank Industry & Technology Malaysia. The main activity is to participate in the
development and industrialization of the country in strategic and selected industries. The
key area of Bank Industri & Technologi’s involvement include financing of shipping,
shipyard and marine-related activities, high-technology manufacturing industries and
technical consultancy services. Bank Pembangunan & Infrastructure Malaysia Berhad.
The main activity of Bank Pembangunan & Infrastructure Malaysia Berhad

(Development& Infrastructure Bank of Malaysia) is to be the premier financial institution
in providing financial facilities to Bumiputra’s in the manufacturing sector, services-
related industries in the manufacturing sector and also financing the country’s main
infrastructure projects.iv) EXIM Bank EXIM Bank was established in August 1995 and
commenced operations in September1995.
EXIM Bank was established with the objectives of financing and promoting the
country’s international trade and facilitating the export of goods and services from
Malaysia by means of export credit, financing of capital investment and provision of
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business information and services. Malaysian Industrial Development Finance (MIDF).
MIDF was set up in 1960 and is a semi-government institution providing medium and
long-term loans to manufacturing industries in Malaysia.
2. Define Base Lending Rate and discuss the importance of Base Lending Rate to
stabilize the economy.
As of 2 January 2015, the Base Lending Rate (BLR) was replaced with the Base Rate
(BR) as the main reference rate for new retail floating rate loans, residential property
loans included. According to Bank Negara Malaysia (BNM), the BLR has become less
relevant as a reference rate for loan pricing. The nature of the BLR system which
employs a fixed rate across all banks, has led to some banks crafting loan products that
offer lending rates with substantial discounts to the BLR.
The BLR also lacks transparency, which makes it difficult for consumers to make an
informed decision. Comparatively, the BR system forces banks to disclose their profits
margin (spread rate) while encouraging healthy competition between the banks.
Ultimately, it benefits consumers as banks will now have to set their BR based on their
individual efficiencies. The Base Lending Rate was set by BNM and is based on how
much it costs to lend money to other financial institutions.
This rate changes according to the Overnight Policy Rate (OPR), which is also
known as interest rate at which a bank borrows funds from another financial institution.
The OPR is set by BNM and is revised from time-to-time. A bank may indicate that its
BLR is 6.80% and its lending rate is 2.45%. Thus the interest or Effective Lending Rate
(ELR) charged to the customer is 4.35%. Meanwhile, the Base Financing Rate (BFR) is
the BLR’s equivalent for Islamic loan product.
BNM then decided to reduce the OPR due to uncertainties in the global environment
which could also negatively impact Malaysia’s growth prospects. Central banks also tend
to increase interest rates to tackle inflation based on the scenario that growth is too strong
and on fears that there could be asset imbalance in the system. When the interest rate is
too low for too long, the cost to get funding is cheaper and as such, people may tend to
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over-borrow or a systemic slowdown can happen which then puts the economy in bad
shape. However, an increase of the OPR will lead to an increase in loan interest rates.
This will mean higher costs of borrowing, which can then also curb the accumulation
of personal and household debts. Therefore, the rise and decrease of OPR can also be as a
form to manage the country’s economy and also to manage the country’s monetary
situation.
It was also reported that Bank Negara is of the opinion that Malaysia’s economy has
become more firm, with both the domestic and external sectors registering strong
performance. The country’s gross domestic product (GDP) growth is estimated at 5.2% to
5.7% in 2017 and estimated to be 5% to 5.5% in 2018. Therefore, the reason behind plans
to increase the OPR may also be as a result of Malaysia’s economy growth. Whilst Affin
Hwang believes the rationale for increasing the OPR is to prevent the economy from
exceeding its potential output level, which could then translate into higher inflationary
pressure.
3. On 8th November 2019, Bank Negara announced that the Statutory Reserve
Requirement SRR ratio will be lowered from 3.50% to 3.00% effective from 16
November 2019. Explain what will be the impact to the economy.
The SRR requires banking institutions to maintain balances in their statutory reserve
accounts equivalent to a certain proportion of their eligible liabilities at no interest. The
ratio will be reduced by Bank Negara from 3.5% to 3.00% is to maintain sufficient
liquidity in the domestic financial system. It will allowing the banks to generate
additional returns while stimulating lending activities in the country.
BNM’s decision to lower the SRR threshold is thus a net positive for the Malaysian
banking sector which is bracing against moderating loan growth and tighter interest
margins. Neither Islamic nor non-conventional banks have to been spared in this scenario.
The SRR cut is seen as timely to alleviate some of the pressure facing the banking sector.
A reduction in SRR will inject a certain amount of liquidity into the financial system,
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which is expected to be lend out by the banks to finance more economic activities in the
market.
BNM’s decision to maintain the OPR was a relief for banks, as there were growing
expectations the central bank would deploy monetary easing to stimulate the domestic
economy amid a slew of external risk. According to BNM, the SRR can be raised to
manage the significant buildup of liquidity in the banking system which could result in
financial imbalances and create risk to financial stability.
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References
1. Ibrahim Abdul Rahman and Siti Norbaya Mohd Rashid, Financial Market and
Banking Operations, Universiti Teknologi Mara
2. Bank Negara Malaysia Berhad Website (www.bnm.gov.my)
3. The Star Online (www.thestar.com.my)
4. The Edge Market Website (www.theedgemarkets.com)
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Development Financial Institutions (DFIs) are established by the Government to

The main activity of Bank Pembangunan & Infrastructure Malaysia Berhad

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