Lecture 3 Monitoring Institutions PDF

BANK NEGARA MALAYSIA (BNM) Week 3  Central Bank  The most important financial institution  Government agency  Public policy function-monitoring operations of financial system, controlling & enhancing the growth of economy  Roles of Central Bank ...

BANK NEGARA MALAYSIA (BNM) Week 3  Central Bank  The most important financial institution  Government agency  Public policy function-monitoring operations of financial system, controlling & enhancing the growth of economy  Roles of Central Bank  Monetary Stability  Financial Stability  Financial Markets  Financial Sector Development  Financial Inclusion  Payment System  Foreign Exchange Administration  Bank Negara Malaysia (BNM)  Established on 26th January 1958  Central Bank of Malaya Ordinance (CBO), 1958 - regulate and supervise BNM  CBO has been revised in 1994 and now known an Central Bank of Malaysia Act (CBA) 2009  CBA defined BNM as the bank which constitutes the apex of the monetary & banking structure of the country  Bank Negara Malaysia (BNM)  Objectives: 1) Issue currency & keep the reserves & maintain monetary stability 2) Act as a banker & financial adviser to the Government 3) Promote monetary stability and sound financial structure 4) Influence the credit situation to the advantage of Malaysia  Obj # 1: Issue currency & keep the reserves & maintain monetary stability  Ringgit exchange is determined by market forces & interventions are conducted to smooth volatile fluctuations  Maintaining strong reserves both for short term and long term economic recovery Obj # 1: Issue currency & keep the reserves & maintain monetary stability  Price stability- Sound monetary policy  Price stability - key component for economic growth.  Price stability- mobilisation & channeling resources  Control INFLATION.  Obj # 2: Banker/Adviser to the Government  Managing the liabilities of the government, both in Malaysia or abroad.  Advises Government on its loans programs  Responsible for trading, registering, settlement & redemption of Government securities.  Provide temporary advances to cover any deficit.  Obj # 3: Promote sound financial structure  Strong framework – banking institution operate in a sound & practical manner  Formulation & implementation of specific rules  Off-site monitoring: review the financial reports  On-site examination: plan & customized examination to match the size, activities & risk profiles of the banking institutions  Ensure good payment system : RENTAS (Real Time Electronic Transfer of funds & Securities) Obj # 4: Influence the credit situation in Malaysia  Related closely with the 1st objective  Mobilize financial resources for productive use  Adequate money supply will help to stabilize the credit situation in the economy  Monetary Theory - In a study of how money would affect the aggregate output in the economy will use theory called Monetary Theory - This theory relates changes in the quantity of money to changes in aggregate economic activity and the price level - Money supply is closely linked to economic activity  Functions of Money 1)Standard of value for all the goods and services. Without money proper trade transaction will not take place. 2)Medium of exchange. 3)Store of value – A reserve for future purchasing power 4)Perfect liquid asset in the financial system  Money & Inflation  Inflation is an increase in the overall level of prices (goods & services)  Upward movement in the average level of prices is inflation.  Opposite of inflation is deflation which is a downward movement in the average level of prices.  Price stability – is the boundary between inflation & deflation  Purchasing power of money will change due to INFLATION  Inflation is a result from high rate of money growth Money & Inflation (Cont..)  The average price of goods and services in an economy is called aggregate price level  Inflation normally will affect individuals, businesses and the government.  An important problem to be solved and normally at the top of the political & policymaking agendas.  Money & Interest Rates  Money plays an important roles in interest rates fluctuations  Too much money in the market – interest rate will increase  Too little money in the market – interest rate will decrease  Movement of money supply in the market will influence overall economy condition  Monetary Policy  Definition: the management of money and interest rate  The used of various tools by BNM to control the availability of loanable funds in view to achieve national economic goals (full employment & price stability)  BNM is responsible for the conduct of monetary policy– regulating money & credit conditions in the economy  Monetary policy has 4 important elements:  Money supply  Availability of money  Pricing of money  Direction of its used  Monetary Policy (Cont..) Tools used: Deposit reserve requirements Discount rates Open market operations Margin requirements on purchase of securities  Monetary Policy (Cont..) 1) Reserves  Deposit held at BNM + currency & coin held at the bank vaults  Raw materials for the depository institution to be used to create credit & will result the money supply to grow  Money supply closely linked to income, production, prices & employment  Monetary Policy (Cont..) 2) Open Market Operations (OMO)  Principal policy tool  Definition: Buying & selling government & other securities by BNM to affect the quantity & growth of legal reserves and ultimately the credit condition in the economy  Monetary Policy (Cont..)  OMO has 2 major effects on the banking system & credit condition: 1) Interest Rate effect  A situation where central banks buys or sells a large quantity of government securities at any one time  If purchase securities -create additional demand in the market, will increase the price & lower the yield. In this case interest rates decline  If selling securities -increase the supply of securities in the market, will depress the price and raise the yield. In this case interest rates tend to rise  Monetary Policy (Cont..) 2) Reserves effect  Day to day effect of central bank OMO is to change the level & growth of legal reserves.  A Central bank purchase of government securities increase the reserves of the banking system, expand its ability to make give out loans & create deposits --- increase money growth & credit.  Selling of securities by central bank will decrease the level & growth of reserves & ultimately reduce money growth & credit.  Fiscal Policy  Fiscal policy - the decision made on the government spending and taxation  Budget deficit – excess of government expenditure  Budget surplus – tax revenues exceed government expenditure  Monetary & Fiscal Policy in Islamic economy  Islamic code of life – human welfare  Objective in economic field – guarantee basic needs, full employment, implementation of Islamic norms & values, equitable distribution of income & wealth  Monetary & Fiscal Policy in Islamic economy (Cont..)  Goals of economic policy in Islamic government: 1) Establish Islam at all levels in the country 2) Achieve high level of economic growth 3) Optimum utilization of resources 4) Create economic environment of gainful opportunities Policy measures: Monetary & fiscal policy  Instruments of Islamic Monetary Policy  Islamic economy – abolition of interest  Main element monetary policy in capitalist economy is interest  Islamic monetary policy tools & instruments: 1) Regulations of high-powered money 2) Statutory reserves requirement 3) Profit ratio 4) Lending ratio 5) Demand deposit ratio 6) Refinance ratio  Instruments of Islamic Monetary Policy (Cont..) 7) Open Market Operations (OMO) 8) Credit rationing 9) Moral suasion Objectives of Monetary Policy in Islam  Stability in the value of money  Economic well-being with full employment and optimum rate of economic growth  Distributive justice  Tutorial How Bank Negara controls the spending of the people in the country?