In the context of short history of five decades since independence, Malaysia undergoes a rapid development in its economy under a peaceful, prospectus and dynamic environment. The success in transition from a mining and agricultural dominant to a multi-sector based economy stimulates the development of the banking system of Malaysia. Malaysia is the only country adopting a dual banking system which establishes its unique role of International Islamic Financial Center. The conventional banking system is working on parallel with the Islamic banking system, both equally comprehensive and viable.
Malaysian banking system comprises of monetary and non-monetary institutions. The central bank, Bank Negara Malaysia (BNM), and the commercial banks belong to the former section while the latter is further divided into two groups. The first group, which is supervised by the BNM, includes finance companies, merchant banks, discount houses, foreign banks representative offices, and offshore banks. The second group is supervised by various government departments and agencies include development finance institutions, savings institutions, provident and pension funds, insurance companies, and other financial intermediaries. Most of these banking institutions no longer exist today. Some of them were acquired by the commercial banks while some undergone consolidation and merged with others.
The Central Bank
Bank Negara Malaysia (BNM) was established on 26th January 1959 under the Central Bank of Malaysia Act 1958. It is a statutory organization entirely owned by the Malaysian Government. BNM is budgeted with the paid-up capital progressively increased, currently at one hundred million Malaysian ringgit. The Bank reports to the Minister of Finance all the matters relating to monetary and financial sector policies. Recently, the CBM Act was repealed by new Central Bank of Malaysia Act 2009, which was enacted on 25th November 2009. In response to the new act, BNM can now define monetary policy autonomously through Monetary Policy Committee. The practice of regulatory reach and oversight are also strengthened. The parallel running between conventional and Islamic Banking is officially recognized in the new act.
The main objective of the bank is to maintain both monetary and financial stability to facilitate the continuous growth of the Malaysian economy. The primary functions of the bank are as follows:
(a) to formulate and conduct monetary policy in Malaysia;
(b) to issue currency in Malaysia;
(c) to regulate and supervise financial institutions which are subject to the laws enforced by the Bank;
(d) to provide oversight over money and foreign exchange markets;
(e) to exercise oversight over payment systems;
(f) to promote a sound, progressive and inclusive financial system;
(g) to hold and manage the foreign reserves of Malaysia;
(h) to promote an exchange rate regime consistent with the fundamentals of the economy; and
(i) to act as financial adviser, banker and financial agent of the Government.
There are laws to empower BNM to regulate and supervise the banking system and other non-bank financial intermediaries in order to meet the above objectives. The administration of Malaysia's foreign exchange control regulations is also part of BNM's duties. With a view of the Asian Financial Crisis, BNM would be the last resort to inject funds to save the banking system.
Commercial Banks
Commercial bank is vital in Malaysian economy mainly because they provide a major source of financial intermediation to other sectors and their checkable deposit liabilities represent the majority of the nation's monetary resources.
There are 23 commercial banks in Malaysia. 9 of them are domestic banks, Affin Bank Berhad, CIMB Bank Berhad, Hong Leong Bank Berhad, just to name a few. The other 14 are locally incorporated foreign banks operating in Malaysia including Bank of America Malaysia Berhad, Bank of China (Malaysia) Berhad, Deutsche Bank (Malaysia) Berhad, etc.
Commercial banks constitute the largest and most important group all of financial institutions in Malaysia. Over the past years, total asset has been increased significantly from RM886 billion in 2005 to RM1361 billion in 2009. The magnificent 53.6% growth shows the robustness of the banking sector in Malaysia. It also reveals the confidence of the financial institutions, business enterprises and individual who are the major depositors of the banks. To associate the growth in asset level with the banking system, total deposits also increased by RM154 billion or 35.6% in the past 5 years.
Expansion in commercial banks in Malaysia has also been in terms of increasing number of bank branches. There is a total of 2010 branches of different commercial banks as at 31st December 2009, which mainly concentrated among the nine anchor banks: Malayan Banking Berhad (387), CIMB Bank Berhad (321), Public Bank Berhad (248), RHB Bank Berhad (189), AmBank Berhad (187), Hong Leong Bank Berhad (184),EON Bank Berhad (139), Alliance Bank Berhad (99) and Affin Bank Berhad (90).
Apart from the increase in number of branches, the products and services provided by the conventional banks has been improved to support the increasing demand of banking services. Banks in Malaysia nowadays not only offer traditional services like deposits and loans/hire purchase, but also services with more sophisticated features such as ATMs, auto pay, auto-debit, phone banking and online shopping and banking. The diversity in the services is facilitated by the development in the advanced technology and increases the accessibility and convenience of the banking services.
In addition to the modification of the products and services, the range of them has also been enlarged. There are more new introduction in investment products like insurance and unit trusts and financing products and services like trading and share financing, and also trade and credit facilities, remittances, loans to priority sectors and Islamic banking. The new business opportunities arose coordinates the continuous expansion of the commercial banking but at the same time increases the competition among them. Therefore commercial banks are encouraged to improve their performance and satisfy customers' numerous needs in order to stand in the competitive environment.
Islamic banking
Over 60.4% of the Malaysians are Muslim. The principle of Islamic law (Sharia) prohibits the payment or acceptance of interest fees for loans of money as well as investing in businesses that provide goods or services. While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community and give rise to the Islamic banking.
There are currently 17 Islamic banks in Malaysia, of which 11 are domestically owned while the other 6 are foreign incorporated. Islamic banking assets reach RM281.7 billion with an average growth rate 18-20% annually. In terms of product offering, more than 60 Islamic financial products and services are available in the market. The emergence of new innovative products and financial instruments that incorporate globally accepted Shariah principles such as home financing, commodity deposits and Islamic profit rate swap in the industry have further elevated the domestic Islamic financial sector to the next stage of advancement.
Development Financial Institutions
The DFIs in Malaysia are specialized financial institutions established by the Government with specific mandate to develop and promote key sectors that are considered of strategic importance to the overall socio-economic development objectives of the country. These strategic sectors include agriculture, small and medium enterprises (SMEs), infrastructure, maritime, export-oriented sector as well as capital-intensive and high-technology industries.
As specialised institutions, DFIs provide a range of specialised financial products and services to suit the specific needs of the targeted strategic sectors. Ancillary services in the form of consultation and advisory services are also provided by DFIs to nurture and develop the identified sectors. DFIs therefore complement the banking institutions and act as a strategic conduit to bridge the gaps in the supply of financial products and services to the identified strategic areas for the purpose of long-term economic development. The DFIs have, to a large extent, contributed to the development and growth of the targeted sectors.
