IntroductionBank Negara Malaysia (the Central Bank of Malaysia), is a statutory body which startedoperations on 26 January 1959.
Bank Negara Malaysia is governed by the Central Bank ofMalaysia Act 2009. The role of Bank Negara Malaysia is to promote monetary and financialstability. This is aimed at providing a conducive environment for the sustainable growth of theMalaysian economy.Bank Negara Malaysia’s monetary policy stance is to maintain price stability while remainingsupportive of growth. Bank Negara Malaysia is also responsible for financial system stability.This is achieved by developing a sound, resilient, progressive and diversified financial sectorwhich serves to support the sectors of the real economy.
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- Structure and Outline
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It also plays an important function inimplementing initiatives to deepen and strengthen the financial markets, including the foreignexchange market.Bank Negara Malaysia plays a significant developmental role in developing the financial systeminfrastructure in advancing the financial inclusion agenda. This is to ensure all economic sectorsand segments of the society have access to financial services. In addition, Bank Negara Malaysiaalso oversees the nation’s payment systems infrastructure which emphasizes on the efficiencyand security of the financial systems.
As the banker and adviser to the Government, Bank Negara Malaysia provides advice onmacroeconomic policies and the management of public debt. Bank Negara Malaysia is also thesole authority in issuing the national currency and in managing the country's internationalreserves.The Bank has also established the Agensi Kaunseling Dan Pengurusan Kredit (AKPK), withbranches located across Malaysia to help consumers manage their debts and become more self-reliant in their financial affairs and thereby preserve the resiliency of the household sector in theeconomic growth process. Apart from that, the Bank was also instrumental in the setting up ofthe Ombudsman for Financial Services (OFS), an independent body providing consumers withobjective and timely solutions to disputes, claims and complaints arising from services providedby financial institutions.As the financial system becomes more developed, the Bank has taken measures to raise the levelof financial literacy among consumers.
Given today's sophisticated financial markets, productsand services, the Bank has initiated its Consumer Education Programme nationwide to reach outto the masses. This comprises, namely,bankinginfo and insuranceinfo initiatives; inclusion oftargeted school children in the Bank's outreach programme to enhance their financial education;and financial education roadshows to reach out to members of the public, including those in therural areas.Bank Negara Malaysia assessed that domestic financial stability continues to be well-supportedby sound financial institutions and orderly domestic financial markets. Since last meeting inNovember 2017, global financial market volatility has increased amid renewed uncertaintiesregarding the pace of interest rate normalisation in the advanced economies.Bank Negara Malaysia 14 March 2018, the financial stability committee (FSC) is high-levelinternal committee of the bank.
It is responsible for monitoring and taking actions to reduce oravert risks to financial stability stemming from both system-wide and institutional developments.Section 29 of the Central Bank of Malaysia Act 2009 defines “risk to financial stability” as “arisk which in the opinion of the Bank disrupts, or is likely to disrupt, the financial intermediationprocess including the orderly functioning of the money market and foreign exchange market, oraffects, or is likely to affect, public confidence in the financial system or the stability of thefinancial system”.Importance of Central Bank in economic growthCentral Bank utilises five major forms of economic policy which consist monetary policy, fiscalpolicy, exchange rate policy, prices and income policy and national debt management policy thatconducted by governments to boost economic growth. Monetary policy concerns with theactions taken by central banks to influence the availability and cost money and credit. Inaddition, monetary policy also helps to control some measure of the money supply and the leveland structure of the interest rates. Fiscal policy refers to changes in the level and structure ofgovernment expenditure and taxation designed to influence the economy. An expansionary fiscalpolicy means a higher government spending relative to taxation. The effect of this policies wouldencourage more spending and boost the economic growth.
On the other hand, a contractionaryfiscal policy means raising taxes and cutting expenditure. Exchange rate policy involves thetargeting of a particular value of a country’s currency exchange rate, so it influences the flowswithin the balance of payments. However, exchange rate policy may be used in conjunction withother measures such as exchange controls, import tariffs and quotas in some countries. Pricesand incomes policy are intended to influence the inflation rate by means of either statutory orvoluntary restrictions upon increases in wages, dividends and prices. National debtmanagement policy is concerned with the manipulation of the outstanding stock of governmentdebt instruments held by the domestic private sector. National debt management policy is toinfluence the level and structure of interest rates and the availability of reserve assets to thebanking system.Functions of Bank Negara MalaysiaBank Negara Malaysia acts as an adviser to government and lender of last resort. It managesthe government’s liabilities and advises the government on its loan programmes which includethe terms and timings of the loans and the issuance of new types of securities.
They haveresponsibility for trading, registering, settling and redeeming Government securities through itstrading and settlement system. Lender of last resort (LOLR) is one of the main functions of thecentral bank, which they offer loans to banks that are experiencing financial difficulty such asbank run. Moreover, the Central bank is in charge of currency issuance and management ofinternational reserves. They need to maintain a cover of above 100% of their currencyliabilities so they need to maintain full gold and foreign currency to back their currency. In thelight of the currency exchange rate are market driven, Central Bank only can intervene to smoothexcessively volatile fluctuations.
With a strong reserves position, the government can fortify ourcountry against unpredicted destabilizing development, sustain market confidence and improvecreditworthiness and government has more flexibility in the conduct of domestic policies.Central bank helps the government to issue currency (Ringgit Malaysia) in Malaysia. In addition,the central bank needs to ensure stability through formulating and conducting monetarypolicy.
Central Bank needs to guarantee that there is adequate money to allow the economy toexpand along its long-term potential growth under situations of relatively little or no inflation.Central Bank can help to minimize the fluctuations of recessionary which can deteriorateeconomy as a short-term measure. Besides, central bank provides a sound, progressive andinclusive financial system to ensure the existence of strong and effective prudential framework.It ensures the level of risks assumed by the banking system is kept to a manageable level so theneed to seek help from the central bank will be minimised. It conducts supervisory activitiesthrough regulations and off-site monitoring and on-site examination. Off-site monitoring iscentral bank reviews the financial condition of all the banking institutions. An on-siteexamination is the central bank conduct customized examination to match the size, activities andrisk profiles of the concerned banking institution.
Organizational StructureThe Bank Negara Malaysia is controlled by the government, so it does not have any privatizedshareholders. The Bank's Board of Directors consists of eleven members and are responsible forthe oversight of the management and operations of the Bank and reviews the performance of theBank in delivering its mandates. The ex-official members of the Board are the Governor, theDeputy Governors and the Secretary-General of the Treasury.
The other directors are prominentleaders who have vast experience in the public and private sectors. All members, except theDeputy Governors, are appointed by His Majesty the Yang di-Pertuan Agong. The DeputyGovernors are appointed by the Minister of Finance.
The Board is statutorily required to meet atleast once in a month.The responsibility to ensure safety, soundness and robustness of the financial institutions lieswith the supervision functions in Bank Negara Malaysia. In continuing to achieve a higher levelof efficiency and effectiveness in performing the supervision role, Bank Negara Malaysia hadconducted a holistic review of the financial supervisory and regulatory functions to ensure thatthe departments continue to support the achievements of the strategic results and the desiredoutcomes of Bank Negara Malaysia. The realignment exercise particularly has resulted insupervision departments playing the supervisory role along the functional lines and types ofinstitutions; a transition from the previous sector specific demarcation of responsibilities.
This isintended to achieve a more integrated and holistic supervisory approach with the ability toidentify emerging trends and vulnerabilities and to be able to understand the dynamics of inter-relation of various departments and functions.The function of the Supervision Sector is to develop, enhance and implement a sustainable,progressive and robust risk-based supervision framework on respective financial institutionsunder their purview, to ensure the safety and soundness of these institutions in the adoption ofbest practices, sound governance and proper risk management. The responsibilities of therespective Supervision Departments are as follows:? Financial Conglomerates Supervision: Supervision of domestic financialconglomerates? Banking Supervision: Supervision of foreign banks, stand-alone investment banks andall Islamic banks including Islamic banking subsidiaries of domestic banks? Insurance and Takaful Supervision: Supervision of insurance companies, reinsurancecompanies, takaful operators, retakaful operators as well as international takaful operatorsWhile the sector specific supervisory approach is retained, a matrix reporting framework isadopted for the supervision of the financial institutions that are part of financial conglomerates.This is to enable an integrated approach to supervision and assessment of the risk profile to beundertaken on a group basis across the banking and insurance sectors.
The Governor is the Chief Executive Officer of the Bank and is assisted by two DeputyGovernors and eight Assistant Governors.Most of the 36 departments/units in the Bank areorganised into eight divisions, where each Assistant Governor including a General Manager,being responsible for one.For a better understanding of the structure, please refer to the Bank's organisation chart below:Strategy of Central BankThe strategy of central bank is using the targets to boost economic growth. They utilize the toolswhich include open market operations(OMO), discount policy and reserve requirements as thestepping stone. OMO are the purchases and sales of securities in the open market by the CentralBank. Discount policy is policy taken by the Central Bank to increase and decrease the moneycirculation by raising or lowering bank rates. Reserve Requirements are the proportion ofcustomers' deposits a bank is required by the Central Bank to hold in reserve without loaning out.Besides, there are operating targets and intermediate targets.
Operating targets concern aboutreserve aggregates which include reserves, non-borrowed reserve, monetary base, non-borrowedbase and interest rates (short-term such as federal funds rate). In addition, they prioritizeintermediate targets to reach goals. Intermediate targets consist monetary aggregates (M1, M2and M3) and interest rates (for short-term and long-term).Last but not least, we use three strategies above to achieve our goals. The central bank tries thebest to have high employment, price stability, financial market stability, stable economic growth,interest rate stability, stability in foreign exchange markets and so on. For instant, price stabilityconsidered an essential objective of economic policy, given the general wish to avoid the costsassociated with inflation and it also viewed as desirable because a rising price level createsuncertainty in the economy and this can adversely affect economic growth.
Moreover, interestrate stability viewed as desirable economic objective because volatility in interest rates createsuncertainty about the future and this can adversely impact on business and consumer investmentdecisions.Different types of instruments of Central BankThe instrument of monetary policy are tools or devise which are used by the monetary authorityin order to attain some predetermined objectives. There are two types of instruments of themonetary policy which are quantitative and qualitative instruments. The Quantitative Instrumentsare also known as the General Tools of monetary policy. These tools are related to the Quantityor Volume of the money. The Quantitative Tools of credit control are also called as GeneralTools for credit control. They are designed to regulate or control the total volume of bank creditin the economy.
These tools are indirect in nature and are employed for influencing the quantityof credit in the country. The general tool of credit control comprises of following instrumentswhich are Bank Rate Policy (BRP), Open Market Operations (OMO) and Variation in theReserve Ratios (VRR).Bank Rate Policy (BRP) is a very important technique used in the monetary policy forinfluencing the volume or the quantity of the credit in a country.
The bank rate is a traditionalweapon of credit control used by a central bank. In order to perform its function as lender of lastresort to commercial banks, it will discount first-class bills or advance loans against approvedsecurities.Open Market Operations (OMO) involve the purchase or sale of securities, such as TreasuryBills or Government bonds, by the Central Bank in order to influence the money supply. Whenthe Bank sells or purchases these securities to or from a bank or an individual, money iswithdrawn from or added to the flow of money in the economy. The Central Bank is the currentOfficial Registrar and Transfer Agent of securities for the Government, the Bahamas MortgageCorporation, the Bridge Authority and the Clifton Heritage Authority.
The Bank maintains botha primary and secondary market for the Government's local currency securities, which at presentincludes Treasury Bills and Registered Stock.The variable reserve ratio (VRR) is comparatively new method of credit control used by centralbanks in recent times. The variable reserve ratio device springs from the fact that the centralbank, in its capacity as Bankers Bank, must hold a part of the cash reserves of commercial banks.The minimum balances to be maintained by the member banks with the central bank are fixed bylaw and statutory powers have been conferred on the central bank to alter the quantum of theseminimum reserves. The customary minimum cash reserve ratio is an important limitation on thelending capacity of banks.Products and services providedIn this technological era, we may find that the number of people using smart devices to surfinternet is astounding. Therefore, Bank Negara Malaysia has utilised internet technology todeliver its innovative products and discretionary service. To fulfil diverse needs of whole societyand not forget the countryside’s community, Bank Negara Malaysia provides a variety offinancial services that have high accessibility.
Its network of financial access points covers mostpart of Malaysia, so people can access to the minimum financial services of accepting depositand withdrawal of funds. Moreover, Bank Negara Malaysia also provides basic banking service,microfinance, micro savings, microinsurance and microtakaful and remittance. Basic SavingsAccounts (BSA) and Basic Current Accounts (BCA) are offered at all the banking institutions toMalaysians and permanent residents. These accounts can be opened under individual or jointnames. Small and Medium Enterprises (SMEs) mostly the micro enterprises are also qualifiedto apply for BCAs. BSA and BCA operate in the same way as the common savings or currentaccounts except that these accounts allow you to perform only basic transactions and at aminimal cost or for free.Microfinance is a type of finance which financing amount of up to RM50,000 and withoutcollateral,Pembiayaan Mikro are offered to micro-enterprises and self-employed individuals in afast, easy and convenient manner by 10 joining financial institutions. Microsavings is a branch ofmicrofinance, consists of a small deposit account offered to lower income individual and familiesas an incentive to store funds for future use.
A long-term contractual microsavings with lowdevoted periodical savings and favourable terms is currently being piloted by financialinstitutions to instruct the low-income households a healthy savings habit.Microinsurance and Microtakaful are the small valued insurance and takaful products which arecost-effective, accessible and easy to understand are currently being piloted by some insurers andtakaful operators to protect all segments of the society, especially the low-income householdsagainst shocks to a consumer’s consumption path. Microtakaful is shariah compliant alternativeto conventional insurance because Islamic scholars believe that conventional insurance consistsof riba and gharar which are strictly prohibited in Islamic finance.Remittances are provided by banking institutions and non-bank remittance service providers(RSPs) through branches and/or authorised remittance agents. Licensed non-bank RSPs operatein strategic locations nationwide, including rural areas and offer services beyond normal businesshours. Electronic payments (e-payments) play a crucial role in facilitating a more convenient,secure and cost-effective means of conducting payments over paper-based payment instruments.The benefits of moving to e-payments are not only limited to financial efficiency gains but alsothe promotion of an inclusive financial system.
Current Data of the performance of Central BankA central bank’s performance needs to be assessed on how well it meets its statutory policymandate. But policy outcomes are only one measure of performance and institutional credibility.Central banks incur substantial financial risk and are an important part of overall public sectorfinances.
Maintaining the privilege of operational independence requires a record of successfulpolicy outcomes and sound and prudent financial management. Therefore, financialarrangements and performance expectations are important components of overall central bankinstitutional design. These issues are even more important today. In the Global Financial Crisis(GFC) many governments became guarantors of last resort, and undertook investments that werewell beyond their traditional risk habitat. Central banks were asked to do much more eitherthrough pursuing multiple targets, directing credit flows, or by adopting unconventionalmonetary policies. Some central banks’ balance sheets have expanded enormously.
Central bankcapital has been more at risk from some of these activities, and we have seen reinvestment bygovernments to build capital levels in some central banks.Central bank financial statements do not lend themselves easily to an econometric investigation.Given the lack of international standardization, a specific accounting value for central bankcapital might well signal sufficient strength in one country, but financial distress in another.Moreover, central bank losses have often been accounted for with lags. The consequences of aweak balance sheet might thus be observed in periods where measured financial strength is stillapparently high. Finally, trends in central bank accounting standards, such as the recent tendencyto increasingly use mark-to-market valuation, may lead to systematic changes in the wholesample of countries. This might be particularly troublesome since more sensitive accountingpractices have been introduced in parallel with a worldwide decline in inflation, thus leading to apotential downward bias for parameter estimates.
Perhaps more fundamentally, theories ofcentral bank financial strength do not provide clear guidance as to which of the potentialmeasures should be used when assessing the relation between a central bank’s financialcondition and macroeconomic outcomes. (Figure1)Figure 1.Besides, treasury bills (T-bills) are short-term which usually less than one year, typically threemonths maturity promissory note issued by a national government as a primary instrument forregulating money supply and raising funds via open market operations. Issued through thecountry's central bank, T-bills commonly pay no explicit interest but are sold at a discount, theiryield being the difference between the purchase price and the par-value (redemption value). Thisyield is closely watched by financial markets and affects the yield on municipal and corporatebonds and bank interest rates. Although their yield is lower than on other securities with similarmaturities, T-bills are very popular with institutional investors because, being backed by thegovernment's full faith and credit, they come closest to a risk free investment.On the other hand, treasury bonds (T-bonds) are long-term which maturity over 10 years fixedinterest rate debt security issued by a national government backed by its 'full faith and credit.' T-bonds are the safest form of marketable investment compare to treasury bills and treasury notes.
They have an active secondary market, and usually pay semi-annual interest.(Figure2)Figure 2.Current Issues faced by Bank Negara MalaysiaThe current issues faced by Bank Negara Malaysia lately includes the weakening of MalaysianRinggit (RM) caused by the trading of Malaysian Ringgit (RM) in the offshore non-deliverableforwards market. Other issues faced by Bank Negara Malaysia is accumulating questions byMalaysians that the recent purchase of government land costing RM2Billion which is equivalentto S$678million.Bank Negara is faced with the weakening of Malaysian Ringgit (RM) due to foreign bankstrading the Malaysian Ringgit (RM) in the offshore non-deliverable forwards market. To preventand protect Malaysian Ringgit (RM) from weakening more than it already has, Bank NegaraMalaysia has sent forms of letters to foreign banks to stop them from making any tradingactivities which involves the trade of any offshore Malaysian Ringgit (RM) non-deliverableforwards or offshore derivatives. The foreign banks have to provide a detailed plan to BankNegara Malaysia of its needs to make Malaysian Ringgit (RM) onshore and to seek help fromMalaysian Financial Institutions for any foreign exchange transaction needs.
To execute anyforeign exchange transactions, foreign funds and asset managers were asked to contactMalaysian Licensed Banks to enable the authorities to tighten controls on Malaysian Ringgit(RM) to prevent further weakening of it.It’s not surprising and it is undeniable that tons of Malaysian Ringgit (RM) is lost, causing issuesto be faced by Bank Negara Malaysia. Bank Negara Malaysia’s comparatively small foreignreserves compared to other Asian countries has left Bank Negara Malaysia with fewer optionswhich needs such measures more than other Asian Central Banks. Malaysia’s foreign holdingsare one of the largest in Asia at 40% of the total outstanding bond market, investors typically usethe liquid NDF markets in Singapore and Hong Kong to hedge their exposure because of themany restrictions in the domestic (Malaysia) market.On the other hand, another issue which is faced by Bank Negara Malaysia which is questionsgrowing around Bank Negara Malaysia’s recent purchase of government land for RM2billion,which observers say it’s fairly unusual for Bank Negara Malaysia to pay market price for stateland. This sparked a claim toward a highly sensitive issue which is to bail out troubled state fund1Malaysia Development Berhad (1MDB), which on December 2018 forked out US$602.
7millionto settle a debt with Abu Dhabi’s International Petroleum Investment Company (Ipic).Bank Negara Malaysia’s responded that the purchase was an “arm’s length transaction” whichfurther fuelled arguments whether the financial regulator should be making such deals atcommercial prices. It was said that Bank Negara Malaysia itself wanted to purchase the land andwanted to do so for a period of time but wasn’t approved by the government up until this point oftime and at their own will. The land was announced purchased on Jan4 while (Ipic) confirmed areceipt of the US$600million payment from 1MBD on Dec27 on the previous year, this just addmore issues to be faced by Bank Negara Malaysia and put them in a troublesome position whichis not easy to cope with while getting questioned by the media and Malaysian citizens.
But as the saying goes, Bank Negara Malaysia has acquired many tracts of land over manydecades at market price, this statement was declined by some stating that Bank Negara Malaysiahas never spent so much on land, which put Bank Negara Malaysia in difficult position.According to the 2014 annual report of Bank Negara Malaysia, it states that they spent a total ofRM112million on land holding as of 2013. Whereby in 2014, they spent another RM1.25billionon an undisclosed amount of land and made no acquisitions since, until this recent deal.In 2015, the Monetary Policy Committee (MPC) maintained the Overnight Policy Rate (OPR) at3.25%, this is due to Bank Negara Malaysia was focusing on ensuring that monetary conditionssupported the growth of the Malaysian economy while maintaining price stability. While againsta challenging external environment that affected the Malaysian economy, it (the monetarypolicy) remained accommodative and supportive of the economy activities.
Bank NegaraMalaysia projected that the Malaysian economy would grow at a steady pace between 4.5% and5.5% during that year. As in the inflation, Bank Negara Malaysia forecasted to range between2.0% to 3.0% as lower commodity prices and the lower global inflation were expected to offsetthe increase in domestic cost factors and the effects from a weaker Malaysian Ringgit (RM)exchange rate, which was not a good position for Bank Negara Malaysia to be in for thisparticular year.As for the year 2016, Bank Negara Malaysia’s business plan was based on the strategiesidentified 7 focus areas including i) Monetary Stability ii) Financial System Stability iii) GreaterFinancial Intermediation and Inclusion iv) Progressive, Safe and Competitive PaymentsEcosystem v) Talent Development for the Financial Industry vi) Strengthened Regional andInternational Linkage vii) High Performing and Sustainable Organisation. New initiatives werealso introduced by Bank Negara Malaysia to address emerging priorities.
This business plan wasalso used to measure the bank’s performance. In assessing the bank’s performance, the bankfocus on the impact of their policies for monetary and financial stability. There is a top-downguidance from the bank’s management team, especially the strategic areas that will meet themandates and the required investment resources to meet Bank Negara Malaysia’s objectiveswhich is creating an efficient economy system to improve the financial status of our country(Malaysia), which include increasing the Malaysian Ringgit (RM) exchange rate and positioningBank Negara Malaysia into a better foreseeing future that helps develop a financially successfulcountry.Recently Bank Negara Malaysia’s luck has taken its turn and this is due to Bank NegaraMalaysia and The Securities Commission Malaysia (SC) established a joint working group toaccelerate digitisation of stockbroking industry. This announcement was made at the launch ofthe SC Annual Report 2017 in favour of Bank Negara Malaysia. BRIDGE aims to accelerate thedigitisation of the brokerage industry to enhance operational efficiency and services standards.
The group will encompass the SC, Bank Negara Malaysia and the industry participants includingthe brokers and banking institutions.The SC and Bank Negara Malaysia share a common aim to drive digitisation within MalaysianFinancial Industry. Opportunities to innovate across intermediation value chain and reduced costin both brokerage and banking sectors exists, so it is undeniably important for the regulators tocollaborate with industry to create greater value for the customers, as well as for the long-termdevelopment of the market. This is also a great opportunity for Bank Negara Malaysia to regainits reputation and create an efficient economy situations where funds are channelled sufficientlyfrom surplus units to deficit units.Besides that, the Monetary Policy Committee (MPC) of Bank Negara Malaysia decided tomaintain the Overnight Policy Rate (OPR) at 3.
25%. Global economy continues to strengthen,the global also showing strong growth momentum. For our nation (Malaysia), the strong growthperformance in the last quarter of 2017 continued to be anchored by private sector spending.Bank Negara Malaysia projected that the inflation is lower in 2018 as Bank Negara Malaysia hasexpectations of a smaller effect from global cost factors. A stronger ringgit exchange ratecompared to 2017 will mitigate import costs.
Bank Negara Malaysia is expecting it’sperformance for this coming year to be improved compared to the previous year and states thatMalaysia’s economy would improve as Bank Negara Malaysia aims to control the foreignexchange rate to increase Malaysian Ringgit (RM) for the upcoming financial future for BankNegara Malaysia and Malaysia as a country as a whole itself.