Central Bank of Malaysia

Central Bank System

• A central bank, reserve bank, or monetary authority manages a country's currency, money supply, and interest rates.
• Central banks also oversee the commercial banking system of their respective countries.

Central Bank Objective

• The economic objectives of most central banks are to maintain financial stability, maximize growth, and employment.
• Stability is important because financial instability is a systemic risk that affects the economy as a whole and cannot be diversified away.
• The objectives of a modern central bank include:
  • Achieving macroeconomic stability (domestic inflation and foreign exchange rate)
  • Strengthening the country's financial sector through creating appropriate financial infrastructure
  • Ensuring sound financial health of the country's financial institutions

Role of Central Bank

• The primary function of a central bank is to control the nation's money supply (monetary policy).
• Secondary functions include:
  • Managing interest rates
  • Setting reserve requirements
  • Acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis

Bank Negara Malaysia

• Established on 26 January 1959 under the Central Bank of Malaya Ordinance, 1958
• Governed by the Central Bank of Malaysia Act 2009
• The role of Bank Negara Malaysia is to promote monetary and financial stability, providing a conducive environment for the sustainable growth of the Malaysian economy.

Functions and Roles of Bank Negara Malaysia

• Issue currency and keep reserves to safeguard the value of the currency
• Act as a banker and financial adviser to the Government
• Promote monetary stability and a sound financial structure
• Promote the reliable, efficient, and smooth operation of national payment and settlements systems
• Influence the credit situation to the advantage of the country
• Bank for currency issue
• Keeper of international reserves
• Government Banker and Financial Advisor
• To promote monetary stability and influence the credit situation to the advantage of the country
• Banker to the banks
• Promote a sound financial structure

Monetary Policy Instruments

• Selective instruments:
  • Interest rate (loan and deposits)
  • Credit control and lending guidelines
  • Moral suasion
• General instruments:
  • Statutory Reserve Requirements (SRR)
  • Minimum Liquidity Requirement (MLR)
  • Money Market Operation
  • Discount operation

Statutory Reserve Requirement (SRR)

• Under Section 37(1)(c) of the Central Bank Ordinance, banking institutions are required to maintain a certain percentage of their reserves with BNM.
• SRR is known as a bank's eligible liabilities (EL).
• Increasing the SRR ratio will reduce the lending ability of banking institutions.
• Decreasing the SRR ratio will increase the lending ability of banking institutions.

Minimum Liquidity Requirement (MLR)

• Under Section 38(1) of the Banking and Financial Institutions Act (BAFIA) 1989, banking institutions are required to observe a minimum liquidity ratio.
• Liquid assets include cash, money at call, treasury bills, government securities, government investment certificates, Cagamas bonds, Bank Negara Bills, and Bank Negara Certificates.
• Increasing the MLR ratio will reduce the lending ability of banking institutions.
• Decreasing the MLR ratio will increase the lending ability of banking institutions.

Money Market Operation

• Money market operations are operations conducted by BNM to influence the liquidity situation in the system.
• MMO can be conducted by open market operations via sales and purchase of government papers, and borrowing or lending by BNM in the interbank market.

Discount Operation

• The discount operation is defined as deliberate measures by BNM to influence the interest rate and liquidity situation via various terms and conditions under which commercial banks and money market have temporary access to BNM's credit facilities.
• The interest rate on the loans that BNM charges to banks is called discount rate.

Financial Policy Execution in Malaysia

• Central Bank of Malaysia Act 2009

• Financial Services Act 2013

• Islamic Financial Services Act 2013

• Insurance Act 1996

• Development Financial Institutions Act 2002 (Act 618)### DFIA Emphasis

• Efficient management and effective corporate governance are emphasized

• Comprehensive supervision mechanism and financial position strengthening through prudential requirements

Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (Act 613)

• Offence of money laundering is defined
• Measures for prevention of money laundering and terrorism financing offences are outlined
• Investigation powers and forfeiture of property involved in or derived from money laundering and terrorism financing offences, as well as terrorist property, proceeds of an unlawful activity and instrumentalities of an offence are specified

Money Services Business Act 2011

• Licensing, regulation, and supervision of money services business are provided for
• Money services business includes money changing, remittance, and wholesale currency businesses

Financial Services Act (FSA) 2013

• Principal regulatory objective is to promote financial stability
• Bank's objectives include:
  • Fostering safety and soundness of financial institutions
  • Ensuring integrity and orderly functioning of the money market and foreign exchange market
  • Promoting safe, efficient, and reliable payment systems and payment instruments
  • Encouraging fair, responsible, and professional business conduct of financial institutions
  • Protecting rights and interests of consumers of financial services and products

Islamic Financial Services Act (IFSA) 2013

• Principal regulatory objectives are to promote financial stability and compliance with Shariah
• Bank's objectives include:
  • Fostering safety and soundness of Islamic financial institutions
  • Ensuring integrity and orderly functioning of the Islamic money market and Islamic foreign exchange market
  • Promoting safe, efficient, and reliable payment systems and Islamic payment instruments
  • Encouraging fair, responsible, and professional business conduct of Islamic financial institutions
  • Protecting rights and interests of consumers of Islamic financial services and products