CCR Chapter 2 PDF - Laws and Regulations in Malaysian Banking

SE ) CHAPTER 2 (N O T FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-1 LAWS AND REGULATIONS IN MALAYSIAN BANKING 2. LAWS AND REGULATIONS IN MALAYSIAN BANKING Learning Outcome At the end of the chapter, you will be able to: ) Demonstrate knowledge of...

SE ) CHAPTER 2 (N O T FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-1 LAWS AND REGULATIONS IN MALAYSIAN BANKING 2. LAWS AND REGULATIONS IN MALAYSIAN BANKING Learning Outcome At the end of the chapter, you will be able to: ) Demonstrate knowledge of Laws and Regulations impacting the Malaysian Banking FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Key Topics SE industry. In this chapter, you will be able to read about: Regulations in the Banking Industry A Summary of the Laws Affecting the Credit Function Key Provisions of the Financial Services Act 2013 (FSA 2013) Affecting the Credit Function Central Bank Guidelines on Credit and Loans Foreign Exchange Administration (FEA) Rules and Notices Complementing and Supporting Regulations for the Banking Industry Assessment Criteria During the exam, you will be expected to: Relate the need for laws and regulations governing the Malaysian banking industry. Distinguish the laws, regulations, guidelines and ethics in banking. O T Identify the key provisions of the Financial Services Act 2013 (FSA 2013), and related (N legislation regulating the credit risk function. Identify the Bank Negara Malaysia (BNM) guidelines on credit, including the key requirements of the Foreign Exchange Administration Rules and Notices affecting credit. Identify and apply the relevant key provisions of the main laws and regulations affecting banking and credit. 2.1 REGULATIONS IN THE BANKING INDUSTRY The banking industry needs to ensure a high level of public trust in its operations at all times and must carry out its role in an efficient and reliable manner. The loss of trust could lead to a mass withdrawal of depositor funds, leading to the potential collapse the entire system. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-2 There is a crucial need for legislative and regulatory controls to be exercised over the banking system to safeguard public interest. Some explicit reasons on the need for legislative and regulatory controls are given in Table 2.1: Table 2.1: Reasons on the Need for Legislative and Regulatory Controls ) The banking industry is the main custodian of national wealth in an economy through its deposit-gathering FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Facilitating the Description SE Reason for Regulation process of financial intermediation activities. It oversees the allocation of financial resources for economic development and the financial well-being of the populace. The banking system has a fiduciary duty to exercise competence and prudence in all lending activities using public funds. A lapse of duty or a failure of competence Ensuring banking players perform their fiduciary duties can result in large financial losses, which can lead to a significant loss of public confidence and may precipitate financial crises such as ‘bank run’. In dire circumstances, the government may be forced to bail out banks using taxpayer funds, as most governments of developed economies did during the 2008 Global Financial Crisis. T Maintaining public O trust within the (N banking sector The industry is responsible for maintaining public confidence in the safety of its deposits and funds, as well for performing other duties entrusted to it by the government and civil society. The nature of the financial industry and its operations Protecting the banking system from malicious or accidental human intervention exposes it to a wide range of risks from human error, system malfunction and fraud. Fraud can be perpetuated by outsiders or by internal bank executives. Banking regulations are thus formulated to place responsibilities on bank management to minimise these risks. Fraud and other risks erode public confidence and increase the cost to the economy and taxpayers if a public bail out is required. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2.1.1 Overview of Financial Regulations The regulations of the banking industry in Malaysia comprise direct banking laws such as: the Financial Services Act 2013 (FSA 2013) and the Islamic Financial Services Act 2013 (IFSA 2013); and SE ) supporting legislation such as the Companies Act 2016 (CA 2016). The Central Bank - Bank Negara Malaysia (BNM) - is the principal regulatory FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO agency responsible for enforcing FSA 2013 and IFSA 2013. BNM, in its role as a regulatory agency, issues guidelines from time to time to all financial institutions covered by the FSA 2013 and those covered by the now- repealed Banking and Financial Institutions Act 1989 (BAFIA 1989). The FSA 2013 contains a provision in its Section 272, entitled ‘Savings and Transitional’, which states that executive decisions made under the repealed Acts, with the exception of those specified in Section 16, continue to apply until amended or revoked. This provision is necessary as all guidelines under the repealed Acts are to be adopted as standards under the FSA 2013. Other legislation and regulations may be enacted from time to time to clarify or supplement existing rules and compliance requirements. Figure 2.1 provides an overview of the regulatory components of the banking industry O T in Malaysia. (N 2-3 CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-4 LEVEL 1 CENTRAL BANK OF MALAYSIA ACT 2009 LEVEL 2 SE FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO ISLAMIC FINANCIAL SERVICES ACT 2013 ) FINANCIAL SERVICES ACT 2013 LEVEL 3 REGULATIONS, GUIDELINES, NOTICES AND DIRECTIVES ISSUED BY BANK NEGARA MALAYSIA BNM Guidelines and Circulars Foreign Exchange Administration (FEA) rules FEA notices 1 to 7 and Definitions and Declaration on entities created, incorporated, etc. in Labuan LEVEL 4 OTHER LEGISLATIONS AND REGULATIONS Anti-Money Laundering, Anti-Terrorism Financing & Proceeds of Unlawful Activities Act 2001 Companies Act 2016, National Land Code 1965, Capital Markets and Services (Amendment) Act 2015 (N O T Malaysian Financial Reporting Standards (MFRS), Contracts Act 1950 (Revised 1974) Hire-Purchase Act 1967 as at 30 July 2012, Personal Data Protection Act 2010 as at 15 June 2016, etc. Figure 2.1: The levels of the Malaysian Financial Banking System legislature 2.2 A SUMMARY OF THE LAWS AFFECTING THE CREDIT FUNCTION 2.2.1 The Financial Services Act 2013 (FSA 2013) and Islamic Financial Services Act 2013 (IFSA 2013) The principal objective of the FSA 2013 and the IFSA 2013 is to promote financial stability. Under the Acts, BNM has been assigned two key responsibilities. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING a. BNM shall foster: i. The safety and soundness of financial institutions; ii. The integrity and orderly functioning of the money market and foreign exchange market; iii. Safe, efficient and reliable payment systems and payment instruments; and SE ) iv. Fair, responsible and professional business conduct of financial institutions; and FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO b. BNM shall strive to protect the rights and interests of consumers of financial services and products. FSA and IFSA amalgamate several separate laws to govern the financial sector under a single legislative framework for the conventional and Islamic financial sectors respectively, namely the BAFIA 1989, the Islamic Banking Act 1983, the Insurance Act 1996, the Takaful Act 1984, the Payment Systems Act 2003 and the Exchange Control Act 1953. The two Acts provide BNM with the necessary regulatory and supervisory oversight powers to fulfil its broad mandate within a more complex and interconnected environment, given the regional and international nature of financial developments. One of the key features of both the FSA and IFSA is to provide uniform regulations for the governance and supervision of financial institutions. Another is empowerment of BNM under the FSA to exercise oversight over financial groups for the purposes of promoting the safety and soundness of licensed businesses. Some of the safeguards introduced by the Act include explicit stipulations on O T the licensing requirements for persons undertaking authorised or approved businesses (Section 8, FSA 2013), as well as stipulations on the scope of operations of such authorised persons as banking and investment banking (N 2-5 businesses (Section 14, FSA 2013). FSA 2013 prohibits deposit-taking by any person or organisation except by parties licensed under the Act. Broadly the FSA 2013 covers the following: Authorisation and registration of authorised businesses, registered businesses and representative offices Prudential requirements, which specify, among other things, the power of BNM to set standards on prudential matters, banking compliance requirements and single counterparty exposure limit Rules related to the ownership, control and transfer of licensed businesses Business conduct and consumer protection standards The money market and the foreign exchange market CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-6 Prohibited business conduct Secrecy and permitted disclosures relating to customer information in financial institutions BNM’s powers of investigation, supervision and control of financial services businesses SE ) 2.3 KEY PROVISIONS OF THE FSA 2013 AFFECTING THE CREDIT FUNCTION FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO All banking executives involved in credit related activities should be familiar with the main provisions of the FSA 2013, which, inter alia, deals with the lending of money and provision of credit facilities. Section 2, FSA 2013 defines “credit facility” as: a. the giving of any advance, loan or other facility in whatever form or by whatever name called; b. the giving of a guarantee; or c. any other dealing or transaction as prescribed under Section 4 FSA 2013 by BNM, with the concurrence of the finance minister. Section 4 provides that BNM may, with the concurrence of the Minister, prescribe any dealing or transaction as a credit facility. The credit related provisions of the FSA 2013 can be categorised into three broad areas: Granting of credit Obligations of directors and officers of a licensed business T Contravention and offences under the provisions of the Act (N O The next few sections examine these areas in greater detail. 2.3.1 Prudential Standards (S.47 and S.48 of the FSA 2013) Section 47, FSA 2013 empowers BNM to specify prudential standards for the purposes of promoting the safety and soundness of licenced or approved businesses and operators of designated payment systems; promoting the integrity, professionalism and expertise in the conduct of these institutions; and regulating the affairs and activities of the institutions. These prudential standards may relate to credit concerns such as corporate governance, risk management, capital adequacy, liquidity, related party transactions and the prevention of an institution from being used for criminal activities. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING DEFINITION: Related Party Transaction ‘Related party transactions’ means transactions with an institution involving: A director, officer or shareholder of the institution; SE the decisions of the institution; ) Any person in a position to influence or control the institution or affect FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO A relative or dependent of any person referred to above; or Any other person as may be specified by BNM, which in the opinion of BNM may cause the institution to be in a conflict-of-interest situation. ‘Relative’ includes adopted persons and half-blood relatives, who are equally considered members of the same family. Section 48 of the FSA 2013 requires that institutions ensure that their internal policies and procedures are consistent with prudential standards specified by BNM. Institutions are required to manage their business, affairs and activities in a manner consistent with sound risk management and governance practices that are effective, accountable and transparent. This provision requires any director or officer of an institution to comply with the internal policies and procedures of the institution. 2.3.2 Exposure to a Single Counterparty (S.50 FSA 2013) Section 50, FSA 2013 restricts the amount of exposure a licensed person can T have to a single counterparty, including exposure to any group connected O to the counterparty. This provision exempts exposures to and exposures that are explicitly guaranteed by BNM or the Government from such restriction. (N 2-7 BNM is authorised to specify what constitutes “connected”, “counterparty” or “exposure”. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-8 DEFINITION: BNM Guideline on the Single Counterparty Exposure Limit (BNM/RH/GL 001-38) KEY TERMS Exposure refers to all claims, commitments and contingent liabilities arising from on-and off-balance sheet transactions (in both the banking ) and trading books) in both ringgit and foreign currency (based on its FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 1. outstanding loans, advances and receivables; SE Ringgit-equivalent amounts), which include, but are not limited to: 2. deposit placements and margins held with counterparties; 3. debt and equity securities held, including exposures arising from holdings of primary market securities for distribution; 4. investments in collective investment schemes; 5. exposures arising from derivative contracts; and 6. exposures under off-statement of financial position instruments. Large exposure refers to total exposures to a single counterparty which is equal to or greater than 10% of the banking institution’s total capital. Interbank money market transactions refer to Ringgit and foreign currency transactions in the money market with a contractual maturity of one year and below which include secured or unsecured borrowing and lending, and the buying and selling of papers with a remaining maturity of one year and below. EXPLANATION On 9 july 2014, BNM issued the Single Counterparty Exposure Limit BNM/ T RH/GL 001-38 Guideline. The single counterparty exposure limit (SCEL) (N O represents a non-risk adjusted backstop measure to ensure that exposures to a single counterparty or to a group of connected counterparties are within prudent limits at all times. BNM views any breach to the SCEL as a serious matter. Banking institutions must notify BNM immediately of any breaches together with an explanation of the causes of the breach and the remedial actions taken or to be taken (with a proposed time frame) to bring the exposures within the SCEL. During the rationalisation period, the banking institution shall not increase its exposures to the affected counterparty (including its connected counterparties). CERTIFICATE IN CREDIT 2-9 LAWS AND REGULATIONS IN MALAYSIAN BANKING The rationale of this policy is stated as follows in the Guideline (S1.1, BNM/ RH/GL 001-38): Risk concentration refers to an exposure with the potential to produce losses that are substantial enough to threaten the financial condition of a banking institution. Risk concentrations can materialise from excessive exposures to a single counterparty and persons connected to it, a SE ) particular instrument or a particular market segment. A risk concentration to a single counterparty may arise through direct exposures to the FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO counterparty and indirectly through exposures to guarantors and protection providers. The magnitude of this risk is significantly influenced by the existence of common or correlated risk factors which in times of stress can adversely affect the creditworthiness of each individual counterparty making up the concentration. The scope of the policy sets out: 1. the prudential limit for exposures to a single counterparty and persons connected to it; 2. the Bank specification as to what constitutes “connected”, “counterparty” and “exposure”; 3. the Bank’s requirements and expectations of banking institutions in managing and monitoring exposures to a single counterparty and persons connected to it; 4. scope and treatment of exposures applicable to a single counterparty and persons connected to it; and 5. expectations with respect to on-going compliance with the SCEL. The policy sets out the Single Counterparty Exposure Limit as follows: A banking institution’s SCEL shall be 25% of its total capital. A banking institution that has an exposure arising from a loss-bearing fund (Restricted Investment Account or RIA) placement made with a licensed Islamic bank or Islamic banking O T operation of a banking institution (fund manager) must apply the look-through approach as described in Appendix 2 of the BNM SCEL policy. A licensed Islamic bank or an Islamic banking (N operation of a banking institution which is the fund manager in this arrangement will not be subject to the SCEL. For an exposure that is guaranteed or protected by credit derivatives a banking Institution may substitute its exposure to the direct counterparty with an exposure to the guarantor or protection provider, subject to fulfilling the criteria set out in the BNM SCEL policy. In the case of exposures guaranteed by either Credit Guarantee Corporation (CGC) or Danajamin, a banking institution is not required to aggregate such exposures with its other exposures to CGC or Danajamin respectively until an event of default occurs. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-10 COVERAGE: EXPOSURES The policy specifies the exposures that are subject to the Single Counterparty Exposure Limit as follows: The SCEL shall be applied to all exposures, notwithstanding the creditworthiness of a single ) counterparty and connected persons or the quality of any underlying security, except for the following: FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO SE ▶ exposures of an overseas branch or subsidiary of a banking institution to the sovereign government or central banks in the jurisdiction where it is located, where the exposure is denominated in local currency and held to meet regulatory requirements imposed by the central bank in that jurisdiction; ▶ exposures to a banking institution licensed by BNM, or a development financial institution, arising from interbank money market transactions; ▶ exposures arising from the granting of intra-day facilities; and ▶ exposures deducted in the calculation of a banking institution’s Total Capital as specified in Regulatory Adjustments of the Capital Adequacy Framework (Capital Components) (e.g. investments in financial subsidiaries). Exposures to, or explicitly and unconditionally guaranteed by, the Federal Government of Malaysia or BNM are also excluded from the computation of the SCEL. The methods of measuring exposures are provided in Paragraph 11 of the Guideline. For the purpose of determining compliance with the SCEL, exposures to a single counterparty must be measured in accordance with the applicable Financial Reporting Standards, unless specified otherwise, and include: On-statement of financial position exposures. Off-statement of financial position exposures, with appropriate credit conversion factor (CCF). T Exposures arising from derivative contracts. O Exposures arising from derivative transactions with the same counterparty. (N Exposures under repurchase agreements and sell and buy back (SBBA) agreements. Exposures under reverse repurchase agreements and reverse SBBAs. Exposures under agency trade transactions, principal trade transactions and free deliveries related to investment bank operations. Exposures to schemes with underlying assets (e.g. investments in collective investment schemes and securitisation transactions). For the purpose of compliance with the SCEL, exposures to a single counterparty may be reduced to the extent that it is secured by eligible collateral, such as the following: cash deposits (including certificates of deposit or comparable instruments issued by the lending banking institution); gold; and securities issued by the Federal Government of Malaysia or the Bank. The recognition of eligible collateral is subject to conditions specified in the BNM SCEL policy. CERTIFICATE IN CREDIT 2-11 LAWS AND REGULATIONS IN MALAYSIAN BANKING DEFINITION: SINGLE COUNTERPARTY In accordance with section 50(2) FSA, in computing the exposure to a single counterparty, a banking institution is required to aggregate its exposures to a single counterparty together with its exposures to persons connected to the single counterparty as they may present a common risk to the banking institution, such that difficulties faced by either FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO A person is regarded as ‘connected’ to a single counterparty if SE capabilities of either one of them. ) the single counterparty or persons connected to it may affect the funding or repayment a. such person or the counterparty has control over the other, whether directly or indirectly, through shareholding, shared management or directorship in accordance with Appendix 4 of the BNM SCEL; or b. such person or the counterparty is economically dependent on the other in accordance with Appendix 5 of the BNM SCEL: i. the exposures are material between the counterparties (for scenarios (a) to (e) in Appendix 5 of the BNM SCEL policy); and ii. the relationship between the counterparties is not easily substituted in the short term (for scenario (e) in Appendix 5); to the extent that the failure or financial difficulties experienced by one counterparty is likely to affect and impair significantly the ability of another counterparty to honour its financial obligations. A single counterparty is regarded as connected to more than one group of persons where the counterparty: a. is jointly controlled by two or more partners or persons that hold equal participation O T in the counterparty; b. is a partner in more than one partnership and exercises control over these (N partnerships; c. is dependent on a sole supplier for its business output and is also solely dependent on its parent for financial assistance; d. is the sole supplier to a group of persons. In such situations, the exposure must be aggregated in each of the counterparty groups. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-12 Where a single counterparty is connected to more than one group of persons, a banking institution may disaggregate the exposure if the following criteria are met A single counterparty or such connected person has sufficient financial resources of its own to obtain credit facilities and to fully service its liabilities; and A single counterparty or such connected person is not relies to support the liabilities of SE ) the other or other persons connected to the counterparty out of it financial resources Exposures to connected persons that are disaggregated shall be treated separately FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO by the banking institution in computing an exposure to that connected person and be regarded as a separate single counterparty. Banking institution must document the assessments to support such disaggregation, The documentation must be accessible to the internal control and risk management function at all time. SCEL’S POLICY Requirements on RISK management expectation BNM’S SCEL Guidelines have significant implications for banking institutions. It requires that an institution have in place procedures for conducting economic the policy. Banking Institution should also endeavour to conduct econimic dependence assessments for all other exposures considered material to the banking institution based on banking institution’s risk tolerance, to determine the extent of exposure to a single counterparty There are also specific requirements for the bank, which are set out below. 1. The board of directors(Board) must ensure that: a. The Banking institution establishes and adheres at all times to the internal policies governing risk concentrations, as approved by the Board; b. the internal policies are reviewed regularly (at least annually) in order to remain T current, adequate and appropriate for the banking institution at all times. Any O material changes to the established policies are to be approved by the Board; and (N c. independent reviews are conducted regularly to verify compliance with prudential limit and standards set by the Bank, as well as with established internal policies. CERTIFICATE IN CREDIT 2-13 LAWS AND REGULATIONS IN MALAYSIAN BANKING 2. Senior management must: a. establish and internal policies, processes and procedures governing risk concentrations; b. clearly communicate and monitor compliance with the internal policies; and c. establish and maintain implement adequate systems (either automated or SE single counterparties in a timely manner. ) otherwise) that are able to identify, measure, monitor and aggregate exposures to FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 3. The internal policies on risk concentration must include the following as a minimum: a. procedures for identifying, measuring, monitoring, controlling and reporting single counterparty exposures of the banking institution; b. detailed internal parameters for identifying persons connected to a single counterparty; c. internal exposure limits (including limits on total large exposures) that are reflective of the banking institution’s risk appetite and risk bearing capacity, and also take into consideration the potential changes to the market value of the underlying exposures; d. clearly defined roles and accountability to ensure compliance and effective communication of the policies, procedures and internal limits throughout the banking institution; e. measures to manage and address compliance with the SCEL, including authority and procedures for approving exceptions to the internal limits which, in any case, must not exceed the SCEL; and f. the nature and frequency of reporting to the Board and senior management. 4. Although certain types of exposures and counterparties are excluded from the SCEL T (as specified in Paragraphs 10.1 and 10.2 of the Guideline), these exposures are not risk- O free. Banking institutions should have adequate procedures and controls in place to (N monitor these exposures. In addition, banking institutions should also ensure that its portfolios are not overly concentrated in large exposures. Banking institutions must exercise a reasonable degree of due diligence, including applying the principle of ‘know your customer’, in obtaining sufficient information on their customers to determine interconnectedness. More information about the SCEL can be downloaded from www.bnm.gov.my CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-14 2.3.3 Taking Shares of Licenced Persons as Security—(S.87 to 94, FSA 2013) The following provisions have an impact when commercial banks or investment banks take shares of licensed persons as security for the granting of credit facilities in the event of subsequent default, and where there is a Description FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Section SE ) need to dispose those shares in repayment. Section 87, FSA 2013 places limits on the acquisition of shares that will exceed a threshold spelled out in the relevant section. Such acquisitions will need prior written approval from BNM and other necessary authorities before such a transaction can take place. Section 87(1), FSA 2013 prohibits a person from entering into an agreement or arrangement to acquire any interest in shares of a licensed person which will result in the acquirer holding, together with any interest in existing shares of the licensed person, an aggregate interest of five per cent or more in the licensed person. Section 87 It also prohibits a person from entering into a subsequent agreement or arrangement to acquire interest in shares which will result in such person holding an interest in shares of, or exceeding, any multiple of five per cent or the percentage (N O T holding that prompts the mandatory offer under the Malaysian Code on Take-Overs and Mergers prescribed under Section 217 of the Capital Markets and Services (Amendment) Act 2015, unless the approval of BNM is obtained. In addition, sub-section 87(2) FSA prohibits a person from entering into an agreement or arrangement to acquire any interest in shares of a licensed person which will result in such person holding more than fifty per cent of interest in shares of a licensed person unless the approval of the Minister, on the recommendation of BNM, is obtained. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING Section 88 prohibits a person from exercising control over a licensed person, unless the approval of the Minister, on the recommendation of BNM is obtained. However, this prohibition is not applicable to: a. any director or chief executive office of a licensed person in respect of the carrying out of his duties and functions in SE 88 ) Section the management of the licensed person; and FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO b. a person who has obtained an approval of the Finance Minister, under S.90(6) to hold more than fifty per cent of the interest in shares of the licensed person. Section 89, FSA 2013 requires a person who has an aggregate interest in shares of a licensed person of— Section 89 a. more than fifty per cent; or b. fifty per cent or less but with control over the licensed person to obtain the prior written approval of the Minister if he disposes his interest in shares in, or ceases to have control over, a licensed person. Section O T 92 (N 2-15 Section 92, FSA 2013 states that an individual shareholder shall not hold more than ten per cent of interest in shares of a licensed person. Section 93, FSA 2013 requires a director or an officer of a licensed person or a financial holding company to notify BNM Section 93 of any information relating to the: a. agreement or arrangement referred to in clause 87 or 89 which has been or is about to be effected; or b. non-compliance with shareholder suitability standards by a person who has been approved by BNM or the Minister. 2.3.4 Related Party Transactions—S.47(2)(e) Under Section 47(1) of the FSA 2013, BNM may specify standards on prudential matters to promote: CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-16 a. the sound financial position of an institution; or b. integrity, professionalism and expertise in the conduct of the business, affairs and activities of an institution. These standards may include those relating to related party transactions (S.47(2) (e)). In this context, S.47(3) specifies that, “related party transactions” SE a. a director, officer or shareholder of the institution; ) means transactions with an institution involving: FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO b. any person in a position to influence or control the institution or affect the decisions of the institution; c. a relative or dependent of any person referred to in paragraph (a) or (b); or d. any other person as may be specified by BNM, which in the opinion of BNM may cause the institution to be in a conflict-of-interest situation. 2.3.5 Banking Secrecy—S.133 Section 133(1), FSA 2013 prohibits a person, including the institution itself or any director, officer or agent of the institution, who has access to any document or information relating to the affairs or accounts of a customer of the relevant institutions (including banks and investment banks) to disclose that information to another person, whether it be during his tenure of office or his employment or thereafter. The above, specified by Section 133(1), shall not apply to any document or information relating to the affairs or account of any customer of a financial institution: T a. that is disclosed to the Bank, any officer of the Bank or any person appointed (N O under this Act or the Central Bank of Malaysia Act 2009 for the purposes of exercising any powers or functions of the Bank under this Act or the Central Bank of Malaysia Act 2009; b. that is in the form of a summary or collection of information set out in such manner as does not enable information relating to any particular customer of the financial institution to be ascertained from it; or c. that at the time of disclosure is, or has already been made lawfully available to the public from any source other than the financial institution. Meanwhile, Section 133(3) states that no person who has any document or information which to his knowledge has been disclosed in contravention of Section 133(1) shall disclose the same to any other person. In other words, this provision prohibits any person from disclosing in any manner any information or document which he knows to have been disclosed in contravention of the duty to preserve secrecy. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING Finally, S.133(4) states that any person who contravenes subsection (1) or (3) commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or a fine not exceeding ten million Ringgit or both. Section 134, FSA 2013 contains exceptions to Section 133. These include the permitted disclosures set out in Schedule 11 of the Act and a disclosure ) which is approved in writing by BNM. Permitted disclosures are detailed as SE follows: FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO ▶ A financial institution or any of its directors or officers may: a. for such purposes or in such circumstances as set out in the first column of Schedule 11, disclose any document or information relating to the affairs or account of its customers to such persons specified in the second column of that Schedule; or b. disclose any document or information relating to the affairs or account of its customers to any person where such disclosure is approved in writing by the Bank. ▶ The financial institution, or its directors or officers, making a disclosure for the purpose or in such circumstances set out in Schedule 11 and paragraph (1)(b), shall be subject to such conditions as may be specified by BNM. ▶ For the purposes of subsection (2), BNM may at any time amend or revoke any existing conditions or impose any new conditions in respect of permitted disclosures by the financial institutions set out in Schedule 11 [see below] or paragraph (1)(b). ▶ (4) Any person who receives any document or information relating to O T the affairs or accounts of a customer as permitted under subsection (1) (N 2-17 shall not disclose such document or information to any other person. ▶ (5) In any proceedings under paragraphs 3, 4, 5, 6 or 7 of the first column of Schedule 11, or in circumstances approved by the Bank under paragraph (1)(b), where any document or information is likely to be disclosed in relation to a customer’s account, the court may, on its own motion, or on the application of a party to the proceedings or of the customer to which the document or information relates: a. order that the proceedings be held in camera and in such case, the document or information shall be secret as between the court and the parties thereto, and that no such party shall disclose such documents or information to any other person; and b. make such further orders as it may consider necessary to ensure the confidentiality of the customer information. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-18 ▶ Unless the court otherwise orders, no person shall publish the name, address or photograph of any parties to such proceedings as are referred in subsection (5), or any document or information likely to lead to the identification of the parties thereto, either during the proceedings or at any time after they have been concluded. ▶ Any person who fails to comply with conditions imposed by the Bank ) pursuant to subsection (2) or (3) or contravenes subsection (4) or (6) SE commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years, to a fine not exceeding ten million FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Ringgit or to both. PERMITTED DISCLOSURES Purposes for or circumstances in which customer documents or information may be disclosed 1. Documents which is or information permitted in writing by the customer, the executor or administrator of the customer, or in the Persons to whom documents or information may be disclosed Any person permitted by the customer or, as the case may be, the executor, administrator or legal personal representative. case of a customer who is incapacitated, by any other legal personal representative. In connection application (N O T 2. for with a an Faraid certificate, grant of probate, letters of administration or a distribution order under the Small Estates (Distribution) Act 1955 [Act 98] in respect Any person whom a financial institution in good faith believes is entitled to obtain a Faraid certificate, the grant of probate, letters of administration order. or a distribution of a deceased customer’s estate. 3. In a case where the customer All persons to whom the disclosure or has been wound up or the bankruptcy or winding up or is declared bankrupt, is being dissolved in Malaysia or in any country, territory or place is necessary in connection with dissolution. outside Malaysia. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 4. Any criminal proceedings or All persons to whom the disclosure financial institution and: the criminal proceedings or civil civil proceedings between a a. its customer, his surety or is necessary for the purpose of proceedings. guarantor relating to the or making more parties adverse SE b. two ) customer’s transaction; claims FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO to money in a customer’s account when the financial institution seeks relief by way of interpleader; or c. one or more parties in respect of property in or over or which interest some has right been conferred on the financial institution. 5. Compliance by a licensed All persons to whom the disclosure bank which has been served garnishee order. bank or licensed investment a garnishee order attaching is required to be made under the moneys in the account of a customer. Compliance O T 6. (N 2-19 7. with a court order made by a court not lower than a Sessions Court. All persons to whom the disclosure is required to be made under the court order. Compliance with an order An investigating officer authorised enforcement or any officer authorised to carry out or request made by agency an in Malaysia under any written law for the purposes of an under the written law to investigate prosecution or any court. investigation or prosecution of an offence under any written law. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 8. Performance of the of Malaysia functions Deposit Insurance Corporation. Any director Malaysia or officer Deposit of 2-20 the Insurance Corporation or any other person, authorised by the Malaysia Deposit Insurance Corporation to receive Disclosure by investment a bank licensed for the Any officer of Commission, the purpose of performance of relevant functions of— Securities approved FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 9. SE ) the documents or information. stock exchange or derivatives exchange, approved clearing house under a. the Securities Commission the Capital Markets and Services as defined in the Securities approved central depository under under the securities laws (Amendment) Commission Act 1993; the b. the stock exchange derivatives or exchange approved under the Capital Markets and Securities Act 2015 Industry or (Central Depositories) Act 1991 authorised to receive information. the documents or Services (Amendment) Act 2015; c. the clearing house approved under the Capital Markets and (Amendment) Services Act 2015; under the or the central depository (N O T approved 10. Securities Industry (Central Depositories) Act 1991. Disclosure by a licensed bank or licensed investment bank for the purpose of performance of functions of Any officer of the approved trade repository authorised to receive the documents or information. an approved trade repository under the Capital Markets and Services (Amendment) Act 2015. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 11. Documents required or by information the Inland Revenue Board of Malaysia under Section 81 of the Income Tax Act 1967 for purposes Any officer of the Inland Revenue Board to of receive information. Malaysia the authorised documents or of facilitating exchange of agreements having arrangements to ) pursuant SE information or effect FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO taxation under Section 132 or 132A of the Income Tax Act 1967. 12. Disclosure of credit information of a customer to a credit reporting agency registered under the Credit Any officer of the credit reporting agency authorised to receive the documents or information. Reporting Agencies Act 2010 [Act 710] for purposes of carrying on credit reporting business as defined in the Credit Reporting Agencies Act 2010. 13. Performance of supervisory any functions, exercise of any supervisory O T powers or discharge of any (N 2-21 supervisory relevant Malaysia duties authority which by Any officer of the relevant authority authorised to receive the documents or information. a outside exercises functions corresponding to those of the Bank under this Act. 14. Conduct of centralised functions, which include audit, risk management, finance or information technology or any other centralised function within the financial group. The head office or holding company of a financial institution, whether in or outside Malaysia, or any other person designated by the head office or holding company to perform such functions. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 15. Due diligence exercise Any financial diligence exercise approved by the approved by the board of directors of the 2-22 institution in connection with: person otherwise participating involved in the or due board of the financial institution. a. merger and acquisition; ) b. capital raising exercise; or SE c. sale of assets or whole or 16. 17. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO part of business. Performance of functions of Any person engaged by the financial are outsourced. function. the financial institution which Disclosure to a consultant or adjuster engaged by the financial institution. 18. A financial institution institution to perform the outsourced Consultant or adjuster engaged by the financial institution. has Any officer of another financial offence under any written law associations of financial institutions reason to suspect that an has been, is being or may be committed. institution or the relevant authorised to receive the documents or information. Section 132 sets out the restrictions on inquiring specifically into the affairs of a particular customer. It provides that the FSA 2013 does not authorise the T finance minister to direct BNM and does not authorise BNM itself to inquire O specifically into the affairs or account of any customer of any authorised (N person. However, subsection (2) of Section 132 empowers BNM to inquire into the affairs or account of a customer of an authorised person for the purposes of exercising its powers or functions under the FSA 2013, the Islamic Financial Services Act 2013 or Section 47 of the Central Bank of Malaysia Act 2009. Other exceptions to the duty of secrecy are provided in Section 145 FSA 2013. Exceptions to Secrecy Requirements Specified in S.143, S.144 Under S.145, secrecy requirements specified in 143(7) and 144(2) shall not apply: for the purposes of the exercise of any of its powers or the performance of any of its functions by the Bank under this Act or the Central Bank of Malaysia Act 2009, including for the purposes of: CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING i. the credit bureau established under Section 47 of the Central Bank of Malaysia Act 2009; or ii. submitting any proposal to the Financial Stability Executive Committee; b. in respect of information provided by the Bank under Section 95 of the Malaysia Deposit Insurance Corporation Act 2011; c. where such disclosure is in summary or consolidated form and does not in SE ) any manner lead to the identification of any person to which the document or information relates. This may include the publication of consolidated FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO statements or reports in respect of each class, category or description of persons as BNM deems appropriate by aggregating the figures in all or any document or information submitted to BNM under Section 143 or 144; and d. for the purposes of prosecuting any person for any offence under any written law. 2.3.6 Offences in Relation to Entries in Documents—S.248 Section 248 FSA 2013 provides for the offences in relation to false entries or omissions, alterations, concealment or destruction of entries in books, records, reports, slips, statements or other documents relating to the business, affairs, transactions, condition, property, assets, liabilities, or accounts of an authorised person, a registered person or an operator of a designated payment system. This provision also makes it an offence for a person to evade the provisions of the Act by altering, forging, destroying, mutilating, defacing, concealing T or removing any document. Credit officers may face severe penalties if they O commit offences in relation to entries in documents. (N 2-23 2.3.7 Liabilities of Officers—S.241, S.249 to 250 and S.254 Credit officers are to avoid committing any offence under the FSA 2013 as the penalties for such offences are hefty and the consequences serious. Such officers may face disciplinary action including dismissal from their employment, as well as civil action and criminal liability under the FSA 2013. The following Table 2.2 highlights some of the key liabilities and their relevant sections in the FSA 2013. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-24 Table 2.2: Key Liabilities of Credit Officers and their Relevant Sections in the FSA 2013 Section Description Section 241 empowers BNM to institute civil actions in court for purposes of seeking the persons responsible to indemnify the licensed person for any loss or damage to a licensed person. ) The liability to indemnify is placed on: b. the director, officer or controller of the licensed person or any person who is acting in such capacity, FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Section 241 SE a. the person convicted of the offence or whose offence was compounded, c. any person who is in any manner or to any extent responsible for the management of the affairs of the institution, d. any person who is assisting in such management, except where the offence was committed without his knowledge, consent or connivance and he has taken reasonable precautions and exercised due diligence to prevent the commission of the offence. Section 250 Section 250 renders the principal liable for any act, omission, neglect or default of his employee, director, controller or agent in the course of his employment or in the course of carrying out his function, or by his agent when acting on behalf of the principal. Section 251 Section 251 provides that an offence punishable under the FSA 2013 is a sizeable offence. A police officer not below the rank of inspector or an investigating officer appointed by BNM under Section 219 may arrest without warrant any person whom he reasonably suspects to have committed or to be committing any such offence. (N O T Section 249 Section 249 states that a director, controller, officer, partner or any person purporting to act in any such capacity, or a person who is involved in the management of a body corporate or unincorporated, to be liable for an offence committed by the body unless he proves that the offence was committed without his consent or connivance and that he exercised all such diligence to prevent the offence as he ought to have exercised, having regard to the nature of his function in that capacity and to the circumstances. Section 253 Section 253 empowers the Governor of BNM, with the written consent of the Public Prosecutor, to compound any offence committed by any person punishable under the FSA or any regulations made under the FSA. Section 254 Section 254 makes it an offence to attempt, abet or perform any act preparatory to the commission of an offense (whether or not the offence is subsequently committed under the FSA 2013). The same penalty as that provided for the offence is applicable. Section 256 provides that when a person discloses in good faith to BNM, his knowledge, belief or any document or information that a breach or contravention has been or is about to be committed: Section 256 a. he shall not be liable for a breach of confidentiality; b. it shall be a defence in any legal action that the disclosure was necessary for the carrying into effect of the provisions of the FSA 2013; or c. no contractual rights or remedy may be enforced against the person. CERTIFICATE IN CREDIT 2-25 LAWS AND REGULATIONS IN MALAYSIAN BANKING 2.3.8 Breach or Contravention Not to Affect Contract, Agreement or Arrangement—S.270 Section 270, FSA 2013 provides that no contract, agreement or arrangement, entered into in breach or contravention of the FSA 2013 shall be void solely by reason of such breach or contravention. However, nothing contained in this section shall affect any liability of any person for any administrative, civil or FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 2.4 CENTRAL BANK GUIDELINES ON CREDIT AND LOANS SE ) criminal actions under the FSA 2013 in respect of such breach or contravention. BNM’s Guidelines (Garis Panduan) are divided into the following subjects: Capital adequacy Prudential limits and standards Financial reporting Anti-money laundering and counter terrorism financing Ethical behaviour and discipline of bank directors and employees 2.4.1 Capital Adequacy BNM’s capital adequacy and related requirements imposed on financial institutions are based on Basel1 principles to ensure more dynamic and resilient banking institutions. These requirements include: ▶ Minimum capital requirements of each financial institution, including a definition of capital and its various eligible components T ▶ Defining risk assets and the computation of risk weighted assets for O determining capital adequacy and liquidity reserves (N Relevant guidelines on capital adequacy are as follows: 1. Risk Weighted Capital Adequacy Framework (Basel I—Risk Weighted Assets Computation) - Updated 23rd October 2009. 2. Capital Adequacy Framework (Basel II—Risk Weighted Assets) - Updated 3 May 2019. 3. Risk Weighted Capital Adequacy Framework (Basel II)—Disclosure Requirements - Updated 13th August 2013. 4. Guidelines on Recognition and Measurement of Profit-Sharing Investment Account as Risk Absorbent - Updated 26th July 2011. 5. Capital Adequacy Framework (Capital Components) - Updated 9 December 2020. 1 Basel refers to the regulations set by the Basel Committee on Banking Supervision, which have been voluntarily adopted as a global regulatory standard. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-26 6. Risk Weighted Capital Adequacy Framework (Basel II)—Internal Capital Adequacy Assessment Process (Pillar 2) - Updated 31 March 2013. 7. Notification on the Implementation of Basel III - Updated 16th December 2011. 8. Reissuance of the Capital Adequacy Framework (Basel II – Risk Weighted Assets) and the Capital Adequacy Framework for Islamic Banks (Risk ) Weighted Assets) - Dated 2nd March 2017. SE 9. Reissuance of the Capital Adequacy Framework (Capital Components) FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO and Capital Adequacy Framework for Islamic Banks (Capital Components) - Dated 6th September 2017. 2.4.2 Prudential Limits and Standards BNM Guidelines on prudential limits and standards cover: Definition of a single customer and the credit exposure limits to various customer groups and industries or economic sectors Minimum liquidity requirements and maintenance of statutory reserves Recognition of non-performing financial assets and computation for impairment provisioning and accounting The guidelines on Prudential Limits and Standards relevant to credit include: 1. Single Counterparty Exposure Limit. Updated 5th April 2013. 2. Credit Risk issued on 22nd January 2018. 3. Enhanced Corporate Governance Standards issued by BNM on 3rd August 2016. O T 4. Guidelines on Credit Transactions and Exposures with Connected Parties. (N 5. Guideline on Stress Testing. 6. Classification and Impairment Provision for Loans/Financing. Updated 9th November 2011 Issued on 6 April 2015. 7. Fit and Proper Criteria. Implemented since 28th June 2013. 8. Granting of Credit Facilities Issued on 25th Nov 2015. 9. Financing Facilities with Connected Parties Issued on 13th July 2016. 10. Code of Conduct for Malaysia Wholesale Financial Markets dated 13th April 2017. 11. Climate Change and Principle-based Taxonomy issued on 30th April 2021. 12. Policy Statement on Statutory Reserve Requirement dated 15th May 2020. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING Classification and Impairment Provision for Loans/Financing The Guideline Classification and Impairment Provision for Loans/Financing is relevant to credit. The Guideline, which imposes a more conservative reporting requirement than would be required under accounting standards, sets out the minimum requirements for the classification of impaired loans, and financing and provisioning for loan impairments. The Guideline is applicable ) to all banking institutions (commercial, and investment) licensed under the SE FSA 2013. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO A clear and uniform classification standard is essential for the application of prudential capital adequacy provisions and ensure that financial statements correctly and uniformly record impairment, allowing for ease of comparison between similar entities within the financial sector. The requirements also provide BNM with advance warning of deteriorating accounts and help BNM monitor and supervise financial institutions by providing advance warning of emerging patterns or deterioration in particular sectors of the economy. This in turn helps the Central Bank fulfil its role of supporting financial stability in the country. The Guideline allocates specific obligations to the directors of financial institutions and to their senior management. Impairment, provisioning and write-offs need to be undertaken in accordance with the Guideline to ensure that institutions provide an accurate account of their portfolios. Some examples of inaccuracies arising from management decisions include: delaying the classification of loans in arrears; rolling over or extending the maturity of a loan so that a loan that would have otherwise defaulted continues to perform; T altering loan terms to capitalise interest or altering the rate of interest or O principal; and altering repayment terms to ensure that the loan continues to perform. (N 2-27 While these practices may be necessary to manage impaired loans, the failure to classify these loans as impaired despite failing to meet scheduled payment obligations provides a false picture of the institution’s risk profile, reserves and capital position. The purpose of the Guideline is not to prevent assistance to borrowers who have defaulted, for example by rescheduling repayments, but to ensure that loans are properly classified at all times. The Guideline on Classification and Impairment for Financing/Loans needs to be read in conjunction with the provisions of the Guideline entitled Best Practices for the Management of Credit Risk dated September 2001, which is relevant to the topics of classification of loans and provisioning. The Guideline places special emphasis on the roles of the board, senior management, the credit risk management committee and internal audit; the maintenance of CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-28 adequate policies and procedures; and the maintenance of effective credit risk management processes. The Guideline applies to all loans and financings of any type that may result in the institution incurring a credit exposure, and specifies the following requirements: ) 1. Obligations on directors and senior management to ensure that appropriate SE methodology for credit risk assessment, control and provisioning processes are in place and operating effectively. These need to be appropriate to the FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO size, nature and complexity of the particular institution’s business. 2. Write-off policies must be approved by the board, which is required to address whether appropriate monitoring and reporting mechanisms are in place. 3. Senior management is charged with responsibility of developing and implementing an effective impairment provisions framework and a policy on write-offs. 4. Institutions must have in place a systematic and consistently applied process to reliably classify loans on the basis of credit risk. Institutions may adopt a credit risk grading system or categories based on repayment conduct to reflect credit risk of loans. The system should be able to differentiate “at a sufficiently granular level, the degree of credit risk inherent in the various credit exposures”. Large loans are to be classified individually. Smaller loans that have homogeneous characteristics may be managed on a portfolio basis. 5. Rescheduled loans need to be appropriately classified based on the customer’s ability to repay on the restructured terms. Where a moratorium is granted in exceptional circumstances (e.g. natural disasters), it should O T not be longer than six months. (N 6. Credit judgement used in conjunction with historic loss data or observable data should be subject to a “prudently limited scope for discretion”. 7. Credit history and loss records are to be maintained to support loan loss estimates. 8. In addition to disclosure requirements under the MFRS, institutions must classify a loan as impaired if: ▶ the principal interest is more than three months or 90 days in arrears or where revolving facilities (e.g. overdraft) are in excess of the approved limit for a similar period; ▶ where the amount is past due or in excess of the approved limit for 90 days or three months or less, the loan exhibits weaknesses according to the institution’s credit risk grading framework; CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING ▶ payments scheduled to be made at intervals of three months or more, then as soon as default occurs; ▶ once classified as impaired, a loan can only be reclassified as non- impaired when it has been continuously performing based on its restructured terms for the period set by the institution in its policy; and ▶ loans rescheduled or restructured by Agensi Kaunseling dan Pengurusan ) Kredit (AKPK) may be immediately reclassified as non-impaired once SE customers and banking institutions have agreed to the new terms and FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO conditions. On these guidelines, the evaluation of impairment is under the requirements of the Malaysian Financial Reporting Standard (MFRS) 9 on financial instruments and recognition. For Development Financial Institutions, classification of impaired loans and impairment provisioning is found in the BNM circular BNM/RH/GL/005-3. In determining MFRS 9’s requirements, the aim was to rectify a major weakness in accounting that became evident during the 2007/8 global financial crisis, namely that MFRS 139 resulted in “too little, too late” – too few credits being recognised at too late a stage. MFRS 139’s ‘incurred loss’ model delayed the recognition of impairment until objective of a credit loss had been identified. In addition, MFRS 139 was criticised for requiring different measures of impairment for similar assets depending on their classification. MFRS 9’s impairment requirements use more forward-looking information to recognise expected credit losses for all debt type financial assets that are not measured at fair value through profit and Loss. One consequence is that a credit loss arises as soon as a Bank originates a loan or receivable T – a so called ‘day one loss’. Under MFRS 139, the amount of the recognised O impairment is the same irrespective of whether the asset is measured at amortised cost or at fair value through other comprehensive income. (N 2-29 Recognition of impairment therefore no longer depends on the Bank first identifying a credit loss event. Instead, the Bank always estimates an ‘expected loss’ considering a broader range of information, including: Past events, such as experience of historical losses for similar financial instruments; Current conditions; and Reasonable and supportable forecasts that affect the collectability of the future cash flows of the financial instrument. CERTIFICATE IN CREDIT expected LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-30 2.4.3 Financial Disclosure and Reporting The Policy BNM/RH/PD 032-13 on Financial Reporting was issued on 27 September 2019 and came into effect on 1 October 2019. The policy was issued pursuant to FSA 2013. The policy document clarifies and sets minimum expectations of the SE The general requirements include: ) application of MFRS to a financial institution. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO A financial institution shall ensure that it prepares its financial statements in accordance with the MFRS. The Board is responsible for ensuring that the financial statements are drawn up to give a true and fair view of the state of affairs and the results of the business of the financial institution. For financial instruments that are measured at fair value, a financial institution shall ensure that sound risk management and control processes around their measurement (MFRS 13 Fair Value Measurement) are in place. A financial institution shall ensure that sound methodologies for assessing credit risk and measuring the level of loss allowance are in place. The methodologies employed must incorporate sufficient level of prudence and that the aggregate amount of loss allowance must be adequate to absorb inherent losses in the credit portfolio. There are also specific requirements on the application of MFRS and these include: In applying the impairment requirements under MFRS 9, a banking institution must maintain, in aggregate, a loss allowance for non-credit (N O T impaired exposures and regulatory reserves of not less than 1% of total credit exposures. A banking institution shall classify a credit facility as credit impaired: a. where the principal or interest/profit or both of the credit facility is past due for more than 90 days or three months; b. in the case of revolving credit facilities (e.g. overdraft), where the outstanding amount has remained in excess of the approved limit for a period of more than 90 days or three months; c. where the amount is past due or the outstanding amount has been in excess of the approved limit for 90 days or 3 months or less, and the credit facility exhibits weaknesses in accordance with the banking institution’s credit risk measurement framework: or d. as soon as a default occurs where the principal and /or interest/profit repayments are scheduled on intervals of three months or longer. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING Where a credit impaired facility is rescheduled and restructured, such facility shall remain classified as credit impaired. A banking institution shall only reclassify this facility to non-credit impaired when repayments based on the revised terms have been observed continuously for a period of at least 6 months or a later period as determined by the banking institution’s policy on Laundering and Counter Terrorism Financing FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO 2.4.4 Anti-Money Provisions SE ) rescheduled and restructured facilities. The Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Banking and Deposit-Taking Institutions (Sector 1) has been in force since 15 September 2013. This Guideline was formulated by Bank Negara Malaysia in accordance with the provisions of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLATFPUA) and the Financial Action Task Force (FATF) 40 Recommendations. The Ministry of Finance appointed BNM as the Competent Authority under the AMLATFPUA 2001 through its Financial Intelligence and Enforcement Department (FIED). The Guideline has since been updated by BNM on 31 December 2019. The AML/CFT is intended to ensure that reporting institutions understand and comply with the requirements and obligations imposed on them with regard to money laundering and terrorism financing. Among its specifications, the Guideline sets out the: obligations of reporting institutions with respect to the requirements imposed under the AMLATFPUA; requirements imposed on reporting institutions in implementing a T comprehensive risk-based approach in managing Money Laundering O (ML)/Terrorism Financing (TF) risks; and roles of the reporting institutions’ Board of Directors and Senior Management (N 2-31 in putting in place the relevant AML/CFT measures. The primary aim of the Guideline is to increase vigilance against the deposit and transfer of illegally sourced money within the financial system of the country. Sources of illegal money include money from illegal drug operations, tax evasion, human trafficking and money intended for terrorism activities. Financial institutions, under the Guideline, are required to conduct the following: identify new customers using proper processes and procedures; report suspicious transactions detected by all bank employees; keep customer records for future inquiries; and provide training to bank employees on AMLATFPUA. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-32 Under AMLATFPUA, BNM’s Guideline requires banks to undertake a Customer Due Diligence (CDD) process or an Enhanced Customer Due Diligence (ECDD) process by which the bank can identify and verify the customer and its background. These requirements are part of BNM’s ‘Know Your Customer’ (KYC) policy which acts as a frontline tool in preventing fraudulent practices. Proper ) information on a new customer and understanding intent are essential in the SE credit process to ensure the loan proposed is genuinely required and that the FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO loan applicant is of good character, both in credit and non-credit terms. 2.4.5 Summary of BNM Guidelines on Best Practices for the Management of Credit Risk These guidelines cover the following four areas: a. Appropriate overview by the board of directors and management The board of directors will remain fully responsible for approving policies, while management will be responsible for implementing them. This involves developing a credit culture and credit policies to be adhered to by the bank’s management. b. Adequate infrastructure for credit risk management Infrastructure refers specifically to organised independent functions and processes that ensure credit risk is managed prudently. This includes the establishment of an independent credit risk management committee, competent credit officers with BNM approved accreditation, adequate credit policies and appropriate procedures for credit activities and T collateral assessment. (N O c. An integrated risk management process A sound credit risk management process will include the setup of credit approval criteria that have been approved by the board, a risk measurement framework that specifies an internal risk rating system and an independent credit review system with regular reporting. d. Comprehensive internal controls and audit procedures This part of the guidelines touches on the need for independence of internal auditors, as well as their scope of work. CERTIFICATE IN CREDIT 2-33 LAWS AND REGULATIONS IN MALAYSIAN BANKING 2.5 FOREIGN EXCHANGE ADMINISTRATION (FEA) RULES AND NOTICES 2.5.1 Introduction Malaysia’s exchange control regime is set up to promote economic development by ensuring residents and non-residents have sufficient access ) to financial resources in a stable foreign exchange environment. SE Malaysia’s open economy leaves it vulnerable to global economic fluctuations, FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO and hence requires the country to adopt suitable policies to attract and maintain foreign investment as well as to reduce volatility of the foreign exchange rates to facilitate trade and consumption. This requires Malaysia to liberalise the exchange control regime whenever appropriate. Thus, Malaysia continues to maintain liberal Foreign Exchange Administration (FEA) rules, which are prudential measures to support the overall macroeconomic objective of maintaining monetary and financial stability. BNM is committed in ensuring the FEA rules continue to support and enhance the competitiveness of the economy through the creation of a more supportive and facilitative environment for trade, business and investment activities. 2.5.2 The FSA 2013 and Foreign Exchange Control The FSA 2013 repealed the Exchange Control Act 1953. With the coming into effect of the Financial Services Act 2013 and the Islamic Financial Services Act 2013, the Controller of Foreign Exchange revoked all Exchange Control Notices and all related circular letters under the Exchange Control Act 1953, effective 30 T June 2013. O On 30 June 2013, BNM, exercising the powers conferred upon it by subsections (N 214(2), (5), (6) and Section 261 of the Financial Services Act 2013, issued Notices Pursuant to Section 214 of FSA 2013 in relation to foreign exchange administration (FEA) rules. BNM issued the following Notices, which came into effect on 30 June 2013: Notice 1 - Dealings in Currency, Gold and Other Precious Metals Notice 2 - Borrowing and Guarantee Notice 3 - Investment in Foreign Currency Asset Notice 4 – Payments Notice 5 - Security, Islamic Security, Financial Instrument or Islamic Financial Instrument Notice 6 - Import and Export of Currency Notice 7 - Export of Goods Definitions and Declaration on Entities Created, Incorporated, etc. in Labuan CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-34 Details of these Notices can be obtained from www.bnm.gov.my. These Notices set out transactions allowed by BNM which are otherwise prohibited under Section 214 together with Schedule 14 of the Financial Services Act 2013. Section 214(2) FSA prohibits any person from undertaking or engaging in any transaction set out in Schedule 14 except with the written ) approval of BNM. SE A person must obtain approval of BNM to undertake or engage in transactions that are not provided or allowed by BNM under any of the Notices. The Notices FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO may be amended or revoked by BNM through issuance of subsequent Notices. Non-compliance with any requirement, restriction or condition imposed on transactions set out under these Notices is an offence under Section 214(9) of the Financial Services Act 2013. Upon conviction, any person who commits this offence shall be liable to imprisonment for a term not exceeding ten years, a fine not exceeding RM50 million or both. 2.5.3 Extract of Summary of Foreign Exchange Administration (FEA) Rules Related to Credit (extracted from BNM website—Foreign Exchange Administration) a. Rules Applicable to Residents “Resident” means: ▶ a citizen of Malaysia, excluding a citizen who has obtained permanent resident status in a country or a territory outside Malaysia and is residing outside Malaysia; ▶ a non-citizen of Malaysia who has obtained permanent resident status (N O T in Malaysia and is ordinarily residing in Malaysia; ▶ a body corporate incorporated or established, or registered with or approved by any authority, in Malaysia; ▶ an unincorporated body registered with or approved by any authority in Malaysia; ▶ or the Government or any State Government. i. Investment in foreign currency assets ӽ Residents are free to undertake any amount of investment in foreign currency assets offered in Malaysia by a resident. ӽ Investment abroad. Residents are free to undertake investment abroad using foreign currency funds sourced from abroad. Residents without domestic Ringgit borrowing are free to invest abroad. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING Residents with domestic Ringgit borrowing who are converting Ringgit into foreign currency are free to invest abroad: a. Up to RM50 million equivalent in aggregate for the group of resident entities with parent-subsidiary relationship per calendar year; and b. Up to RM1 million equivalent per calendar year in aggregate for SE ) resident individuals. Residents are free to undertake direct investments abroad using FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO proceeds from foreign currency borrowings obtained from licensed onshore banks or licensed international Islamic banks. ii. Borrowing onshore and offshore ӽ Borrowing in foreign currency Resident entities are free to borrow any amount of foreign currency (FC) from: a. licensed onshore banks; b. resident or non-resident non-financial institution entities within its group of entities; c. resident or non-resident direct shareholders; and d. another resident through the issuance of foreign currency debt securities. A resident may borrow in FC up to a prudential limit of RM100 million equivalent in aggregate from non-resident financial institutions and other unrelated non-residents, including through issuance of O T securities denominated in FC. (N 2-35 Foreign currency borrowing by resident individuals from licensed onshore banks and non-residents, other than immediate family members, is subject to an aggregate limit of RM10 million equivalent. ӽ Borrowing in Ringgit from non-residents Resident entities are free to obtain: a. any amount in Ringgit borrowing to finance activities in the real sector in Malaysia from either non-resident entities within its group of entities or their non-resident direct shareholder; b. up to RM1 million in aggregate from any other non-resident, other than a non-resident financial institution, for use in Malaysia; and c. any amount through issuance of tradable securities or redeemable preference shares (RPS) denominated in Ringgit to non-resident for use in Malaysia. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-36 Resident individuals are free to obtain: ◊ any amount in Ringgit borrowing from non-resident immediate family members; and ◊ up to RM1 million in aggregate from any non-resident other than a non-resident financial institution for use in Malaysia. iii. Buying and selling of currency for own account any purpose. SE ) ӽ Residents are free to buy or sell FC against Ringgit on spot basis for FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Residents are free to buy or sell FC against Ringgit on forward basis based on underlying obligation. A Ringgit derivatives contract other than exchange rate offered by a resident is considered part of underlying transaction. There is also no restriction to unwind or cancel the forward transaction for any obligation except portfolio investment. iv. FX transaction on behalf ӽ A non-resident entity can enter into FX transaction involving Ringgit (spot or forward basis) on behalf of its resident and non-resident related entity. ӽ A non-resident institutional investor (NRII), including custodian/trust bank, can enter into FX transaction on behalf of its non-resident clients. The NRII may also participate in the Dynamic Hedging Framework to actively manage its FX exposure. ӽ A non-resident financial institution can enter into FX transaction on behalf of its non-resident clients for settlement of international trade in goods or services with a resident. (N O T v. Export of goods ӽ All export proceeds must be repatriated to Malaysia in full as per the sales contract which must not exceed six months from the date of export. ӽ Settlement with the non-residents can be undertaken in both Ringgit or foreign currency terms. vi. Foreign currency accounts ӽ Resident entities and individuals are free to open foreign currency accounts with licensed onshore banks and non-resident banks; ӽ There are no restrictions on the source of foreign currency funds to be credited in foreign currency accounts maintained with licensed onshore banks; and ӽ In the case of a resident individual, the account can be maintained individually or jointly with any other resident individual and with a non-resident immediate family member. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING vii. Guarantees ӽ Financial guarantee obtained from non-residents: Residents are free to obtain any amount of financial guarantees from their non-bank non-resident group of entities. Approval is required only for the obtaining of financial guarantees from other non-residents exceeding RM100 million equivalent in SE ) aggregate. ӽ Financial guarantee issued to non-residents: FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO Approval is required for financial guarantees exceeding RM50 million equivalent in aggregate issued by a resident to secure borrowing obtained by a non-resident entity from a non-resident entity which is not within its group of entities. Financial guarantee exceeding RM50 million equivalent in aggregate which do not require approval shall be registered not later than seven business days after issuing or obtaining the financial guarantee. viii. Securities ӽ Residents are allowed to issue securities or Islamic securities: Denominated in Ringgit in Malaysia to non-residents; and Denominated in foreign currency to any person. a. Issuance of debt securities to non-residents is subject to rules on borrowing by residents. b. Residents are allowed to transfer securities, Islamic securities, O T financial instruments or Islamic financial instruments denominated in foreign currency subject to rules on borrowing and investment in foreign currency assets by residents. b. Rules Applicable to Non-Residents (N 2-37 “Non-resident” means: ▶ any person other than a resident; ▶ an overseas branch, a subsidiary, regional office, sales office or representative office of a resident company; ▶ Embassies, Consulates, High international organisations; or Commissions, supranational or ▶ a Malaysian citizen who has obtained permanent resident status of a country or territory outside Malaysia and is residing outside Malaysia. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING i. 2-38 Investments in Malaysia The Malaysian markets are easily accessible by global investors due to the free mobility of the inflow and outflow of capital for investments in the country. ӽ Non-residents are free to invest in any form of Ringgit assets either as direct or portfolio investments. SE ) ӽ The investments can be funded through: The conversion of foreign currency to Ringgit with licensed onshore FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO banks (excluding licensed international Islamic banks) or through an appointed overseas office of the licensed onshore bank’s banking group; Foreign currency borrowings from the licensed onshore banks; or Ringgit borrowing from licensed onshore banks (excluding licensed international Islamic banks) for real sector activities and for the purchase of residential and commercial properties in Malaysia except for the purchase of land only. ◊ Non-residents are free to remit out divestment proceeds, profits, dividends or any income arising from investments in Malaysia. Repatriation, however, must be made in foreign currency. ii. Access to domestic financing ӽ Financing in foreign currency Non-residents are free to obtain foreign currency financing from licensed onshore banks. Proceeds of the borrowing can be utilised (N O T in or outside Malaysia; and Non-residents are also allowed to issue foreign-currency denominated sukuk/bonds in Malaysia for use in or outside Malaysia. ӽ Financing in Ringgit Non-residents other than financial institutions are allowed to obtain Ringgit financing based on the following schedule: CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING Borrower Non- resident other than financial Lender Licensed onshore banks (excluding licensed international Islamic banks) Limit/purpose Free to obtain any amount to finance: real sector activities in Malaysia; the settlement for the ) institution SE purchase of goods or FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO services with a resident; or the purchase of residential and commercial properties in Malaysia except for the purchase of land only. Resident Free to obtain margin financing stockbroking corporation Licensed onshore banks with stockbroking licence Resident companies and individuals Free to obtain any amount to finance real sector activities in O T Individuals who are (N 2-39 immediate family member Employer in Malaysia Malaysia Any amount and purpose Any amount pursuant to the terms and conditions of service and for use in Malaysia iii. Settlement for trade in goods or services Settlement for trade in goods or services with residents can be undertaken in both foreign currency or Ringgit terms. iv. Buying or selling of currency ӽ Buying or selling of Ringgit Non-residents are free to buy or sell Ringgit with licensed onshore banks (excluding licensed international Islamic banks) on spot and forward basis for both current and financial account transactions; CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-40 Non-residents are allowed to buy or sell Ringgit against foreign currency with: ◊ an appointed overseas’ office of a licensed onshore bank’s banking group on behalf of its non-resident clients for: ◊ the settlement of trade in goods or services with a resident; or ◊ the purchase or sale of Ringgit assets; and FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO SE ) ◊ any non-resident financial institution for the settlement of trade in goods or services with a resident. ӽ Buying or selling of foreign currency Non-residents are free to buy or sell foreign currency against another foreign currency in Malaysia only with a licensed onshore bank. ӽ Financial Instruments Non-resident non-banks are free to enter into Ringgitdenominated interest rate derivatives offered by a licensed onshore bank (excluding licensed international Islamic banks). Buying or selling of derivatives involving or with reference to exchange rates shall comply with prevailing rule on buying or selling of currency by non-residents. Non-residents are free to enter into Ringgit-denominated derivatives and approved foreign currency derivatives offered on Bursa Malaysia. Settlement for the above transactions can be made either in Ringgit or foreign currency equivalent. (N O T v. Foreign currency and Ringgit accounts ӽ Non-residents are free to open: foreign currency accounts with licensed onshore banks in Malaysia; and Ringgit accounts in Malaysia. ӽ Funds in these accounts can be freely remitted abroad in foreign funds. vi. Securities Non-residents are allowed to issue securities or Islamic securities denominated in foreign currency in Malaysia to any person. CERTIFICATE IN CREDIT 2-41 LAWS AND REGULATIONS IN MALAYSIAN BANKING 2.6 COMPLEMENTING AND SUPPORTING REGULATIONS FOR THE BANKING INDUSTRY 2.6.1 Central Bank of Malaysia Act 2009 SE FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO subject to the laws enforced by BNM. ) The Act sets out the objectives and obligations of BNM in promoting monetary and financial stability conducive to the sustainable growth of the Malaysian economy. BNM regulates and supervises financial institutions which are 2.6.2 Islamic Financial Services Act 2013 The Islamic Financial Services Act 2013 (IFSA) provides for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities, as well as the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability and compliance with Shariah and related matters. Islamic banks are governed by and licensed under the IFSA. 2.6.2 The Companies Act 2016 The Companies Act 2016 (CA 2016) repealed the Companies Act 1965 (CA 1965) and changed the landscape of company law in Malaysia. The CA 2016 reformed almost all aspects of company law. Section 9(b) CA2016 stipulates that “A company shall have one or more members…..”. This provision allows incorporation of a company with only one member. O T Companies can generally be classified as: (N i. limited and unlimited liability companies; and ii. public and private companies. Section 10(1) of CA 2016 states that a company may be incorporated as “(a) a company limited by shares; (b) a company limited by guarantee; or (c) an unlimited company.’” Where the company is a company limited by shares, the member’s liability is limited to the amount unpaid on their shares, and where the company is a company limited by guarantee, a member’s liability is limited to the amount they agreed to contribute in the event the company is wound up. There is no limit placed on the liability of a member of an unlimited company. To differentiate an unlimited company from the others, Section 25(1) CA2016 provides that the name shall end with the word “Sendirian” or the abbreviation “Sdn”. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-42 A company can also be classified as either a private or a public company. Under CA 2016, a private company is required to have the following characteristics: It is a company limited by shares (S42(1)). It has not more than 50 shareholders (S42(1)). ) It restricts the transfer of its shares (S42(2)). SE It cannot offer its shares or debentures to the public (S43(1)). Under S15 (1) of CA 1965, a private company was prohibited from inviting the public to FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO subscribe its shares or debentures. It cannot allot shares or debentures with a view of offering them to the public (S43(1)). This prohibition was not found in CA 1965. It cannot invite the public to deposit money with the company (S43(1)). Other than the above characteristics, S25 (1) mandates that the name of a private company should end with the words “Sendirian Berhad” or its abbreviation “Sdn Bhd.” In the case of a public company, its name should end with the word “Berhad” or its abbreviation “BHD”. A public company may have one or more of the characteristics imposed on a private company. For example, most public companies are limited by shares. Apart from the name, the other main differences between a private and public company prescribed in CA 2016 are as follows: The statutory minimum number of resident directors for a private company is only one, whereas a public company is required to have at least two resident directors. O T Only a private company may pass a written resolution (S290). (N Only a public company is mandated to hold its annual general meeting (S340). Certain categories of private companies are exempted from having its accounts audited (S255). Under CA 2016, the process of incorporating a company is simplified. The Act introduces a super form for incorporation. Section 15 provides that the Companies Commission of Malaysia (CCM) will assign a registration number to the company and issue the notice of registration upon compliance of the procedure and payment of the appropriate fee. The notice of registration is conclusive evidence that the company is duly registered (S19). The ROC may issue a certificate of incorporation only upon an application by the company and payment of the prescribed fee. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING A pre-incorporation contract is defined in S65(1) CA 2016 as a ’contract or transaction that purports to be made by or on behalf of a company at a time when the company has not been formed.’ Section 65(1) provides that the person who signs the pre-incorporation contract will be personally liable on the contract or transaction accordingly. Unlike their previous position under the CA 1965, they cannot exclude their liability. Nevertheless, the position of ) the company with regard to its liability under the pre-incorporation contract SE remains the same. Section 65(2) permits the company to ratify the contract after its incorporation. If the company does ratify the contract, ‘the company FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO shall be bound by the contract or transaction as if the company has been in existence at the date of the contract or transaction’. Under CA 1965, every company was required to have a memorandum and articles of association. The memorandum and articles of association are now collectively known as the constitution, and it is expressly stated in S31 and S38 CA 2016 that only a company limited by guarantee shall have a constitution; other types of company may or may not have a constitution. It is optional for them. If a company has no constitution, the company, each director and each member of the company shall have the rights, powers, duties and obligations as set out in the CA 2016. For companies which were registered prior to the coming into operation of CA 2016, S619(3) provides that the memorandum and articles of association of a company existing before the operation of the Act shall have effect as if made or adopted under the Act unless otherwise resolved by the company. Thus, a company’s existing memorandum and articles shall form the company’s constitution until the company alters it by passing a special resolution. With effect from 31 January 2017, all companies with share capital migrated T to no par value regime. It is immaterial that the company was incorporated O under CA 1965 or any previous enactment. Section 74 CA 2016 reads, “All shares issued before or upon the commencement of this Act shall have no (N 2-43 par or nominal value”. At common law, a limited company shall not return its capital to its members. However, the CA 2016 has prescribed some exceptions to this general principle. Section 115 provides that a company may reduce its share capital following the procedures prescribed in the section unless its constitution provides otherwise. Generally, a company is not permitted to purchase its own shares or that of its holding company (S123 and S22) unless it is: 1. a redemption of preference shares (S72); 2. a cancellation of shares (S116 & S177); 3. a share buyback by public listed companies (S127) or a remedy awarded by the court in a case of oppression (S346). CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-44 Section 196(1) of the CA 2016 provides that a private company shall have a minimum of one director who ordinarily resides in Malaysia by having a principal place of residence in Malaysia. For a public company, it shall have a minimum of two resident directors. The CA 2016 provides a mechanism for a corporate structuring for a statutory corporate restructure scheme which will bind all creditors. However, the ) company is in a vulnerable state between the formulation of the scheme SE and the approval by the court, for a creditor who does not agree with the FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO scheme may take legal action to recover the loan. Thus, the company or any of its members or creditors may apply to the court for an order to refrain further proceedings against the company except with the court’s leave. The CA 2016 provides that the court can grant a restraining order for a period not exceeding three months. On application, the court may extend the period for not more than nine months (S368(2)). In addition, the CA 2016 has introduced two new corporate rescue schemes – i.e., corporate voluntary arrangement and judicial management. These schemes came into effect on 1 March 2018. There are two ways to wind up a company: i. voluntary winding up where the members have passed a resolution to wind up the company; and ii. compulsory winding up where the court has ordered the company to be wound up (S432(1)). One of the grounds for winding up a company is its inability to pay its debts. Section 466 CA 2016 provides that a company is deemed to be unable to pay its debts if it fails to pay a debt exceeding the amount prescribed by the Minister within 21 days after it is served with a notice of demand at its T registered office. Section 466 also states that the unpaid creditor must file the O petition to wind up the company within six months from the expiry date of the (N notice of demand. The debts of a company can be secured or unsecured. Section 524 CA 2016 gives the secured creditor three options with regard to the property charged by the company to them as security. First, if the secured creditor is entitled to realise the charged property, they may do so and claim for any shortfall as an unsecured creditor (S524(1) (a)) and (3)(a). Second, the secured creditor may value the charged property and claim for the balance as an unsecured creditor (S524(1)(b)). Third, the secured creditor may surrender the charge to the liquidator for the general benefit of creditors and claim as an unsecured creditor for the whole debt (S524(1)(c)). CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2.6.4 Partnership Act 1961 as at 1 July 1974 The Partnership Act 1961 as at 1 July 1974 was drawn up to govern the relationships between partners of a partnership firm and relevant third parties. The most important provision so far as credit purposes are concerned is the joint liability of all partners, whereby the legally binding act of any one partner ) legally binds the other partners too. SE The liability of a partner does not cease upon his departure from the firm but may be discharged by mutual agreement between the partners and FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO creditors. Similarly, a new partner may not be liable for debts incurred before his admission unless he agrees to it. The Act also specifies that no interest is payable for capital contributed by the partners, no salaries are allowed and all profits and losses are to be shared equally. However, the partners of a partnership firm may elect to have a legally binding agreement to set out their mutually agreed terms of partnership and responsibilities thereby avoiding the application of the Act. 2.6.5 Limited Liability Partnerships Act 2012 This Act which came into effect on 26 December 2012 allows business owners to use the business entity for the setting up of a business instead of using a sole proprietorship, limited liability company, partnership or private limited company. A limited liability partnership or LLP is a hybrid version of a partnership that combines the advantages of a limited liability company (LLC) and those of a T partnership. O A limited liability partnership combines two important business concepts: that of limited liability and that of a partnership. In an LLP, the partners (N 2-45 who own it are independent of the partnership itself. Thus, the partnership operates in a similar manner as does a limited liability company; however, the key difference lies in the fact that the ownership terms are to adhere to the Partnership Act as prescribed by Malaysian Company laws. Any business owners planning to establish an LLP in Malaysia must create a partnership agreement that contains details of the partnership. Such details include but are not limited to partners’ responsibilities as well as how the LLP’s profits are to be shared. In Malaysia, an LLP may either have limited or general partners. A limited partner does not have any liabilities with the partnership. For this reason, a limited partner’s personal assets cannot be used to settle debts owed by the partnership. This allows a general partner’s assets to be used to pay any debts CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING 2-46 which the partnership may owe. In this regard, LLP possesses characteristics of both partnerships and limited companies alike. 2.6.6 Civil Law Act 1956 as at 1 April 1972 This Act relates to the application of civil law in Malaysia and accepts the ) application of the common law of the United Kingdom, including rules related SE to equity and certain statutes. It further proclaims that, among others, the law to be administered for commercial matters including banking and business FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO corporations shall be the same as the law of England. Therefore, in the case of disputes, it is possible that case precedents in the UK would be heard and applied in Malaysia as in the UK. 2.6.7 Bills of Exchange Act 1949 (BEA) as at 29 April 1978 The Act defines a bill of exchange as an unconditional order in writing for the payment of money at a specified date. In banking, the cheque is a form of a bill of exchange drawn on a banker, and payable on demand (Section 73(1), BEA). For this reason, the provisions of the BEA are important considerations for banking officers. Relevant issues concerning dishonoured cheques, forgery, bank protection and duties of the banker are covered in the Act. 2.6.8 The National Land Code 1965 Malaysia has a number of laws pertaining to the acquisition, development of and granting of valid security over land to a lender. The main laws governing T land development are: O National Land Code 1965 (N Sarawak Land Code 1958 Sabah Land Ordinance (Sabah Cap. 68) Compulsory purchase and compensation: Land Acquisition Act 1960 Land Conservation Act 1960 Planning and related development regulations: Town and Country Planning Act 1976, Environmental Quality Act 1974 Strata Titles Act 1985 The National Land Code (NLC) is the main canon of land law for the administration of land in Peninsular Malaysia. At the same time, the Sarawak Land Code and the Sabah Land Ordinance govern the states of Sarawak and Sabah respectively. The function of the NLC is to provide a practical way of administering land, by setting up a system of titles and a system for recording of dealings or transactions of land. CERTIFICATE IN CREDIT LAWS AND REGULATIONS IN MALAYSIAN BANKING The Code is based on the Australian Torrens System of land titles. A fundamental principle of the Torrens system is that title to land depends on registration and not on the execution of documents. The execution of the title deeds (e.g., transfers, leases, charges) is merely the means of obtaining registration. Once registered under the Torrens system, a bona fide purchaser has an ) “indefeasible title”, which means that the title cannot be set aside because SE of some defect which existed prior to the land being brought under the Act. FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO The result is that the person who is recorded on the title is held to be the valid o