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Statutory Requirements

In accordance w ith section 48 of the C entral Bank of M alaysia A ct 1958, Bank N egara M alaysia hereby
publishes and has transm itted to the M inister of Finance a copy of this A nnual Report together w ith a
copy of its A nnual A ccounts for the year ended 31 D ecem ber 2005, w hich have been exam ined and
certified by the A uditor-G eneral. The A nnual A ccounts w ill also be published in the G azette.
Zeti A khtar A ziz
C hairm an
Board of D irectors 22 M arch 2006
Statutory Requirements 3/18/06, 10:37 AM 1
Board of Directors
Dr. Zeti Akhtar Aziz
D .K. (Johor), P.S.M ., S.S.A .P., D .P.M .J.
G overnor and C hairm an
Dato Ooi Sang Kuang
D .M .P.N .
D eputy G overnor
Datuk Zamani bin Abdul Ghani
D .M .S.M ., D .S.M ., K.M .N .
D eputy G overnor
Dato Sri Izzuddin bin Dali
S.S.A .P., D .S.P.N ., K.M .N .
Datuk Oh Siew Nam
P.J.N .
Tan Sri Datuk Amar Haji Bujang bin Mohd. Nor
P.S.M ., D .A ., P.N .B.S., J.S.M ., J.B.S., A .M .N ., P.B.J., P.P.D .(Em as)
Tan Sri Dato Seri Dr. Mohd. Noordin bin Md. Sopiee (deceased)
P.S.M ., D .G .P.N ., D .I.M .P., D .M .S.M .
Dato N. Sadasivan
D .P.M .P., J.S.M ., K.M .N .
Tan Sri Dato Sri Mohd Hassan Marican
P.S.M ., S.P.M .T., D .S.M .T., P.N .B.S., A .M .K.
D atuk O h Siew N am , Tan Sri D atuk A m ar H aji Bujang bin M ohd. N or, the late Tan Sri D atoSeri D r. M ohd. N oordin
bin M d. Sopiee and D atoN . Sadasivan w ere reappointed as m em bers of the Board effective 1 M arch 2005.
The late Tan Sri D atoSeri D r. M ohd. N oordin bin M d. Sopiee passed aw ay on 29 D ecem ber 2005.
Board of Director 3/18/06, 10:36 AM 1
G overnor D r. Zeti A khtar A ziz
D eputy G overnor D atoO oi Sang Kuang
D eputy G overnor D atuk Zam ani bin A bdul G hani
A ssistant G overnor D atoM oham ad D aud bin H j. D ol M oin
A ssistant G overnor D atoM ohd Razif bin A bd. Kadir
A ssistant G overnor M uham m ad bin Ibrahim
A ssistant G overnor N or Sham siah binti M ohd Yunus
Secretary to the Board D atoM ohd N or bin M ashor
A dvisor (Special Projects) D r. A ini binti Ibrahim
D irector
G overnors O ffice N g C how Soon
C orporate C om m unications A bu H assan A lshari bin Yahaya
Internal A udit H or W eng Keng
Legal G opala Krishnan Sundaram
Special Investigation Kam ari Zam an bin Juhari
Financial Intelligence Koid Sw ee Lian
Economics
M onetary A ssessm ent and Strategy D r. Sukhdave Singh
Econom ics V. Vijayaledchum y
International Ism ail bin A low i
Finance A bdul A ziz bin A bdul M anaf
Regulation
Bank Regulation D atoM ohd Razif bin A bd. Kadir
Insurance Regulation D onald Joshua Jaganathan
Islam ic Banking and Takaful Bakarudin bin Ishak
D evelopm ent Finance and Enterprise M arzunisham bin O m ar
Risk M anagem ent Santhini a/p C handrapal
Supervision
Banking Supervision I C he Zakiah binti C he D in
Banking Supervision II C hung C hee Leong
Insurance Supervision M ahdi bin M ohd. A riffin
Inform ation System s Supervision Ram li bin Saad
Paym ent System s A hm ad H izzad bin Baharuddin
Investment and Operations
Investm ent O perations and Financial M arket N orzila binti A bdul A ziz
Foreign Exchange A dm inistration W an H anisah binti W an Ibrahim
Statistical Services C han Yan Kit
Organisational Development
IT Services H ong Yang Sing
H um an Resource M anagem ent M ior M ohd Zain bin M ior M ohd Tahir
H um an Resource D evelopm ent C entre Lim Lai H ong
Strategic M anagem ent Lim Foo Thai
C orporate Services D atoM ohd N or bin M ashor
Security A hm ad bin M ansur
Property and Services Zulkifli bin A bd Rahm an
C urrency M anagem ent and O peration Tengku Zaib bin Raja A hm ad
C hief Representative
London Representative O ffice Lillian Leong Bee Lian
N ew York Representative O ffice M ahendran a/l Kanagaratnam
Branch M anager
Pulau Pinang Ram an a/l Krishnan
Johor Bahru A bdul A ziz bin A hm ad
Kota Kinabalu M ohd Ram zi bin M ohd Sharif
Kuching Ishak bin M usa
Kuala Terengganu M okhtar bin M ohd N oh
Shah A lam M ohd. Khir bin H ashim
Senior Officer List 3/18/06, 10:37 AM 1
Contents
Governors Statement
The Malaysian Economy in 2005
2 O verview
6 White Box: Potential Output of the Malaysian Economy
9 White Box: Development of Small and Medium Enterprises
16 Sectoral Review
33 D om estic D em and C onditions
38 Prices and Em ploym ent
46 External Sector
60 White Box: Compilation of Malaysias External Debt: Treatment of Offshore
Financial Entities in Labuan IOFC as Residents
65 Flow of Funds
Monetary and Fiscal Developments
68 M onetary Policy in 2005
69 M onetary D evelopm ents in 2005
74 Exchange Rate D evelopm ents
76 Fiscal Policy and O perations
Outlook and Policy
86 The International Econom ic Environm ent
92 M alaysian Econom y in 2006
98 M onetary Policy in 2006
99 Fiscal Policy in 2006
100 White Box: Key Measures Announced in the 2006 Budget
101 Financial Sector Policy in 2006
The Financial System
108 Sources and U ses of Funds of the Financial System
112 Progress of Financial Sector M asterplan Im plem entation
The Banking System
116 M anagem ent of the Banking System
123 White Box: Data and Systems Challenges in the Implementation of Basel II
126 White Box: The Deposit Insurance System in Malaysia
129 White Box: Establishment of the Credit Counselling and Debt Management Agency
133 White Box: Banking Measures Introduced in 2005
136 Perform ance of the Banking System
149 White Box: Malaysias Anti-Money Laundering and Counter Financing of
Terrorism (AML/CFT) Programme
The Islamic Financial System
156 M anagem ent of the Islam ic Banking System
159 White Box: Maximising the Potential of Islamic Banking Business
163 White Box: The International Centre for Education in Islamic Finance
165 Perform ance of the Islam ic Banking System
170 Islam ic Interbank M arket
Development Financial Institutions
174 O verview
174 Policies and D evelopm ents
177 Perform ance of D evelopm ent Financial Institutions
TOC 3/18/06, 10:37 AM 4
Other Financial Institutions
190 D iscount H ouses
190 Provident and Pension Funds
191 Venture C apital
193 U nit Trust Industry
Financial Markets
198 O verview
199 M oney M arket
201 Foreign Exchange M arket
202 Equity M arket
205 White Box: Key Capital Market Measures in 2005
208 Bond M arket
212 Exchange-traded D erivatives M arket
The Payment and Settlement Systems
216 M anagem ent of the Paym ent System
217 Reducing Risks in the Paym ent System
217 M anaging Paym ent System Stability and C onfidence
218 Enhancing C om petition and Increasing Paym ent Efficiency
220 M igration to Electronic Paym ents
221 M oving Forw ard
223 Perform ance of the Paym ent System s
External Relations
230 Econom ic Surveillance
230 M ultilateral Relations
231 Financial Services N egotiations
233 Islam ic Banking
233 C om bating M oney Laundering and Terrorism Financing
235 Econom ic and Financial C o-operation
238 White Box: Key International Events Hosted by Bank Negara Malaysia in 2005
Organisation and Human Resource
242 O rganisational D evelopm ent
247 Risk M anagem ent in Bank N egara M alaysia
249 O rganisation Structure
Annual Accounts
255 Balance Sheet as at 31 D ecem ber 2005
263 Annex
TOC 3/18/06, 10:37 AM 5
Econom ic expansion strengthened in 2005, driven by strong dom estic dem and and reinforced by the
im provem ent in external dem and. For the third successive year, the private sector has continued to be
the m ain driver of grow th. The im proved grow th perform ance in the second half of 2005 is expected
to be sustained in 2006 as the external environm ent continues to im prove and as dom estic dem and
rem ains robust. The grow th for 2006 is expected to be supported by a m ore broad-based expansion
in all sectors of the econom y. This w ill strengthen further the structure of the econom y and its
potential for sustained grow th over the m edium term .
A distinctive and im portant feature of the M alaysian econom y is its high degree of flexibility. M alaysias
com petitiveness has been derived from this high degree of flexibility. This econom ic flexibility has been
im portant in m itigating the im pact of external shocks and in sustaining M alaysias grow th perform ance
for m ore than three decades. G oing forw ard, the m edium -term grow th prospects for the dom estic
econom y w ill thus hinge on m easures to further strengthen this econom ic flexibility in this m ore
challenging and com petitive global econom y. Therefore, the renew ed em phasis on investm ents in
hum an capital w ill be vital in enabling the w ork force to adjust and support M alaysias transition tow ard
higher value added activities and to new grow th industries. This is vital to m eet the increased dem and
for adequately qualified and highly skilled personnel. This w ill reinforce the ongoing efforts to identify
new sources of grow th to diversify the econom ic base and to enhance com petitiveness of the econom y.
W hile the public sector is com m itted to providing the enabling environm ent for enhancing the flexibility
of the econom y, the private sector also has an im portant role in adjusting to the changes that are
occurring in both the international and dom estic fronts and in capturing the new opportunities that are
em erging in this m ore dynam ic environm ent.
A m ajor challenge confronting the w orld econom y in 2005 has been the sustained high energy
prices during the year. W hile high and volatile energy prices continue to rem ain a risk, the w orld
econom y has, how ever, been better positioned to m anage its econom ic consequences. Im proved
energy efficiency and the globalisation of production have contained its im pact on the global
econom y. The pressure on prices has also been m odest. For several econom ies, how ever, these
trends have prom pted increases in interest rates, particularly in countries w here interest rates have
been at exceptionally low levels. In M alaysia, notw ithstanding the increase in prices in response to
the rise in energy prices, the rate of inflation has rem ained w ithin a m anageable range. The grow th
in labour productivity and capacity expansion com bined w ith increased com petition have
m oderated the price increases. In 2006, the rate of inflation is expected to rise further before it
m oderates during the latter part of the year. The m acroeconom ic conditions, therefore, continue to
rem ain favourable, providing a positive and stable environm ent conducive for the econom y.
M acroeconom ic policies w ill continue to rem ain supportive of the econom y w hile financial conditions
are expected to rem ain favourable. Policy initiatives w ill continue to focus on prom oting high quality
grow th in an environm ent of m acroeconom ic stability. The Federal G overnm ents overall financial
position is expected to strengthen in 2006 as econom ic grow th gains m om entum . The G overnm ent
w ill also continue its policy of fiscal sustainability w ith the financing from non-inflationary sources.
Later this m onth, the G overnm ent w ill launch the N inth M alaysia Plan, w hich w ill outline the
strategies for strengthening the grow th potential of the econom y and enhancing national resilience
over the Plan period, 2006-2010.
Governors Statement
Governor Statement 3/18/06, 10:36 AM 1
In 2005, m onetary policy has continued to rem ain accom m odative. A s the risk of slow er grow th
dim inished in the second half of the year, the policy rate, w hich had rem ained at historical low s since
the 1998 currency crisis, w as raised tw ice, on 30 N ovem ber 2005 and on 22 February 2006. The
increase aim ed to align the m onetary conditions to the current econom ic environm ent. G oing
forw ard, m onetary policy w ill respond appropriately to ensure sustainable grow th in an environm ent
of price stability. W ith interest rates still below neutral levels, m onetary policy continues to rem ain
supportive of the econom y. The m acroeconom ic conditions are also supported by stable conditions in
the assets m arkets. M alaysias long record of strong grow th perform ance in an environm ent of low
inflation over several decades has provided a basis for anchoring inflationary expectations. In addition,
the increased level of C entral Bank com m unications on inflation and on the m onetary policy process
aim s to prom ote a greater understanding on the conduct of m onetary policy and to provide a further
basis for anchoring expectations and thereby contributing tow ards achieving price stability.
Significant progress has been m ade in strengthening the role of the banking system and the capital
m arket to interm ediate funds, thereby enhancing their ability to support and facilitate the econom ic
grow th process. Indicators show increased financial strength and further gains in operational
efficiency essentially reflect the payoffs from the earlier restructuring, consolidation and
rationalisation. Portfolio quality has also im proved w ith the non-perform ing loans ratio continuing its
dow nw ard trend. The successful w inding up of Pengurusan D anaharta N asional Berhad in D ecem ber
2005 m arked the com pletion of the final chapter in the financial sector restructuring exercise
undertaken to address the vulnerabilities that surfaced during the A sian currency crisis. A s part of this
restructuring process, there w as also further strengthening in risk m anagem ent and governance in the
financial institutions during the year. This has also been reinforced by the introduction of a m ore
dynam ic prudential regulatory fram ew ork, supervisory oversight and surveillance.
To further diversify sources of financing in the econom y, several initiatives w ere also taken to enhance
further the role of the bond m arket in the financial system , in particular the private debt securities
m arket. These included m easures to enhance the liquidity of the m arket and to prom ote a m ore
effective price discovery process and thereby enhance the efficiency of the m arket. The private debt
securities m arket now accounts for 52% of G D P exceeding the significance of the governm ent debt
m arket, as it becom es an increasingly m ore im portant source of financing for the corporate sector.
W ith the strengthening of the econom ic and financial resilience, the opportunity w as taken to further
deregulate and liberalise the dom estic environm ent to prom ote greater flexibility and efficiency in the
econom y. A m ajor policy initiative in this direction w as the shift in the exchange rate regim e to a
m anaged float in July 2005. The adoption of the new regim e w as to better position M alaysia to
respond to the structural changes taking place in the regional and international environm ent. In the
context of this shift, there w as no change in the m onetary policy fram ew ork and the conduct of
m onetary policy. U nder the new regim e, the exchange rate w ill reflect M alaysias econom ic
fundam entals and developm ents in the exchange rates of the currencies of M alaysias trading
partners. The regim e also accords greater leverage for M alaysia to respond to external shocks. In
operating under this regim e the C entral Bank does not target any particular level of the exchange
rate, and intervenes only to sm oothen exchange rate volatility, in particular, w hen large short-term
capital flow s create excessive m ovem ents in the exchange rate. W hile the developm ents in the
Governor Statement 3/18/06, 10:36 AM 2
exchange rate are an im portant consideration in the setting of m onetary policy, it is im portant to
em phasise that the C entral Bank does not use the exchange rate as an instrum ent to achieve
m onetary policy objectives. The orderly transition to the new regim e has been positive for the
econom y.
The financial sector continued to be progressively transform ed during the year follow ing the
rationalisation am ong existing institutions, the introduction of new institutions and the strengthening
of the international dim ension in the financial system . The rationalisation efforts through the phasing
out of traditional players such as finance com panies and discount houses have resulted in the
em ergence of new specialised institutions. The consolidation of the retail banking business into a
single entity w ith the m erger of finance com panies and com m ercial banks is now com plete. The
m erger of m erchant banks, stockbroking com panies and discount houses currently being undertaken
w ill see the em ergence of investm ent banking in the financial landscape. These rationalisations aim to
increase the capacity of the financial system to m eet m ore effectively and efficiently the new changing
and differentiated requirem ents of the econom y. The consum er protection fram ew ork w as also
strengthened w ith the establishm ent of the deposit insurance corporation, w hich is now fully
operational.
There has also been greater regional and international integration of the financial system . N ew
licences have been issued to foreign Islam ic financial institutions of w hich one institution has already
com m enced operations. In addition, the potential for foreign participation in the investm ent banks
and in the Islam ic subsidiaries have been raised to 49% . A num ber of dom estic players have also
increased their presence in foreign m arkets. To-date, our banking sector has representations in tw enty
countries. A s part of the process of facilitating increased international integration, the liberalisation of
the foreign exchange adm inistration rules in A pril 2005 has allow ed for greater flexibility and
efficiency in foreign exchange transactions, as w ell as higher foreign participation in the issue of
ringgit-denom inated papers in the dom estic bond m arket. This has contributed to further enhancing
our econom ic and financial inter-linkages w ith other parts of the w orld.
D uring the year, aggregate spending by the household sector has continued to be robust. W hile this
has been supported by increases in incom e, the banking sector has also provided increased financing
to the sector. In order to sustain the contribution to grow th by the household sector, new institutional
arrangem ents have been put in place to ensure that the expansion is com m ensurate w ith the capacity
of the sector to absorb the higher level of indebtedness. A s part of these efforts, a C redit C ounselling
and D ebt M anagem ent A gency is being established as a pre-em ptive m easure to address issues
relating to household financial com m itm ents, to essentially provide financial counselling and loan
restructuring for the household sector.
O ther key policy initiatives in 2005 included ensuring that all segm ents of the econom y have access to
financing. The developm ent of a m ore inclusive financial system is an im portant elem ent that needs to
be taken into account in the developm ent of the dom estic financial system . The focus on financial
inclusion ensures that institutional m echanism s are in place in the form al credit m arket to facilitate
access to credit by m icro enterprises, sm all and m edium scale businesses, and the low er incom e groups.
The aim is to bring these target groups into the econom ic m ainstream , reduce poverty and prom ote a
Governor Statement 3/18/06, 10:36 AM 3
m ore balanced grow th. The strengthening of the institutional arrangem ents that include specialised
developm ent financial institutions, m icro financing institutions and cooperatives has been instrum ental
in prom oting financial inclusion.
Im portant progress w as m ade in 2005 to expedite the developm ent of SM Es in the econom y. Efforts
have focussed on strengthening the supporting infrastructure for SM E developm ent, the introduction
of capacity building m easures and in enhancing the access to financing. A s the Secretariat to the
N ational SM E D evelopm ent C ouncil, the Bank w as actively involved in developing the N ational SM E
D evelopm ent Blueprint for 2006. The blueprint outlines the G overnm ents objectives, targets and
strategies, including the action plans and program m es for 2006 to accelerate the developm ent of
SM Es. A n im portant m ilestone w as the launch of the SM Einfo Portal, a one-stop online inform ation
gatew ay to provide com prehensive inform ation to SM Es on access to financing, G overnm ent support
facilities and training and developm ent program m es for SM Es. The Portal also serves as a platform for
SM Esnetw orking and m arketing activities. D uring the year, SM E access to financing continued to
receive priority. In addition to the establishm ent of the SM E Bank, banking institutions have launched
tw o new trade finance products to encourage greater SM E participation in the export m arket.
Follow ing increased access to financing from the banking sector, SM E loans now account for 43% of
business loans.
Significant progress w as achieved in both the Islam ic banking and takaful sectors in 2005. A t the
sam e tim e, developm ental efforts in Islam ic finance have also been intensified to position M alaysia as
an international Islam ic financial hub. These efforts have been directed tow ards institutional
developm ent, enhancing the dom estic financial infrastructure, strengthening the Shariah and legal
infrastructure, and prom oting greater international integration. The year also w itnessed the
introduction of new foreign players and the transform ation of the Islam ic w indow s in conventional
banks to Islam ic subsidiaries. In addition, the Bank further strengthened the regulation and
supervision of takaful interm ediaries.
In line w ith the considerable progress m ade in the Islam ic banking and takaful sectors, the Islam ic
capital m arket also recorded im pressive developm ents in term s of higher issuances of Islam ic papers
and the introduction of innovations, w hich have contributed to broaden and deepen the dom estic
Islam ic capital m arket. M oving forw ard, efforts to enhance M alaysias position as an international
Islam ic financial hub w ill be strengthened w ith the establishm ent of the International C entre for
Education in Islam ic Finance (IN C EIF) w hich w ill com m ence operations in M arch 2006. This represents
the investm ent in hum an capital w hich is vital for the developm ent of the Islam ic financial services
industry. IN C EIF w ill serve as an international centre of educational excellence in Islam ic finance,
specialising in developing professionals and specialists in Islam ic finance. Such talents are m uch
needed to sustain m arket com petitiveness and m eet the future challenges of the Islam ic financial
industry. The Bank has established an endow m ent fund of RM 500 m illion to support this initiative.
The paym ent system represents an im portant pillar of the overall financial system and the Bank
continued to accord priority in strengthening the efficiency, reliability and security in the paym ent
system . C ontinued efforts have been directed at developing and im proving the m ajor paym ent system
infrastructure to ensure its robustness and to m itigate any system ic risks to the financial system and
Governor Statement 3/18/06, 10:36 AM 4
the w ider econom y. Initiatives have also been m ade to encourage the m igration from paper-based
paym ents to electronic paym ents to increase efficiency and reduce costs. Im provem ents in the
paym ent system s operated by the Bank included the establishm ent of a paym ent versus paym ent
m echanism to reduce inter-bank foreign exchange settlem ent risks and the introduction of a cheque
truncation system to reduce the physical handling of cheques and its related costs. To enhance the
security of paym ent cards, banking institutions have also successfully com pleted the installation of
chip-based term inals in 2005, m aking M alaysia the first in the region to com plete a national chip
m igration exercise. M oving forw ard, intensive efforts w ill be m ade to prom ote debit cards as an
alternative and m ore cost-effective m eans of paym ent. Efforts have also been intensified to increase
public aw areness on the various paym ent channels, products and innovations. The agenda is
essentially to increase the use of electronic paym ents through initiating changes in the infrastructure
and processes, enhancing accessibility and facilitating the right incentive structure to encourage the
active use of electronic paym ents.
The Bank has alw ays accorded priority to organisational developm ent to ensure that the C entral Bank
continually enhances its capacity to m anage the new challenges em erging in this ever-changing
environm ent. In addition to increased investm ents in staff developm ent, changes w ere m ade in
organisational structure, as w ell as the introduction of IC T enhancem ents to raise the level of
connectivity, enhance access to inform ation and to strengthen netw orking. O ther initiatives include
the adoption of a perform ance-based culture and further efforts tow ard becom ing a Know ledge-
Based O rganisation. A ttention w as also given to w ork and space m anagem ent to enhance efficiency,
security and the effectiveness of the functioning of the Bank. D uring the year, w ork com m enced on
the construction of the Financial Services Resource C entre. U pon com pletion, it is envisaged that it
w ill becom e a centre of excellence for know ledge and learning, to support the requirem ents of the
Bank, as w ell as the South-East A sian C entral Banks (SEA C EN ) Research and Training C entre, and the
Islam ic Financial Services Board (IFSB). The C entre w ill also house the Banks Know ledge M anagem ent
C entre, Financial M useum and A rt G allery. G iven the challenging environm ent in w hich the Bank
operates, these initiatives aim to ensure that the Bank delivers the expected results w ith the highest
level of com petence and professionalism .
Zeti Akhtar Aziz
Governor
22 M arch 2006
Governor Statement 3/18/06, 10:36 AM 5
O verview
White Box:Potential Output of the Malaysian Economy
White Box:Development of Small and Medium Enterprises
Sectoral Review
D om estic D em and C onditions
Prices and Em ploym ent
External Sector
White Box:Compilation of Malaysias External Debt: Treatment of Offshore
Financial Entities in Labuan IOFC as Residents
Flow of Funds
2-16
6
9-14
16-33
33-38
38-46
46-65
60-63
65-66
The Malaysian
Economy in 2005
2
OVERVIEW
Notw ithstanding the persistently high oil prices and the
dow nturn in the global electronics cycle, real gross
dom estic product (G DP) expanded by 5.3% . G row th w as
private-sector driven and w as underpinned by supportive
m acroeconom ic policies and favorable financial conditions.
Private consum er dem and w as sustained at a strong pace
w hile the resilience in private investm ent further supported
econom ic expansion. The public sector continued to take
the opportunity of a favourable environm ent to
consolidate its finances to m ore sustainable levels.
The Malaysian Economy in 2005
Real GDP expanded by 5.3% in
2005. Appropriate
macroeconomic policies and
favourable financial conditions
continued to enhance economic
resilience and supported
balanced economic expansion.
G row th w as balanced and broad based, w ith m ost sectors
of the econom y, (except the construction sector) registering
positive grow th rates. Value added in the m anufacturing
sector increased by 4.9% . The developm ents in the
m anufacturing sector w ere influenced by the cyclical turns in
the global electronics industry. The first half-year
experienced slow er production grow th, m ainly as a result of
the m ild dow nturn in the global electronics cycle w hich w as
caused by accum ulation of excess inventories in the second
half of 2004. Dom estic m anufacturers undertook an
inventory adjustm ent exercise and rationalised production at
the beginning of the year. How ever, the subdued
perform ance of the electronics and electrical (E&E) industry
w as cushioned by the strong grow th in selected resource-
based industries, nam ely the chem ical products and off-
estate processing industries, as w ell as strong perform ance
in selected dom estic-oriented industries.
The m anufacturing sector w as stronger in the second half-
year as the export-oriented industries regained strength and
other m ajor dom estic industries continued to expand.
During this period, global sem iconductor sales began to pick
up as global dem and from both businesses and consum ers
w orldw ide increased. Sales in the Asia Pacific region
im proved in the second half-year (18.5% ; 1H2005: 14.1% )
spurred by strong dem and for m obile com puters due to the
increasing popularity of w ireless system s as w ell as the pick-
up in global dem and for consum er electronic products such
as m p3 players, digital cam eras, digital televisions and
cellular phones. M alaysian producers, w ho had com pleted
their inventory adjustm ent in the earlier part of the year,
w ere w ell-positioned to take advantage of the higher
dem and and as a result, production and sales expanded. In
the dom estic-oriented industries, output of the food
products and transport equipm ent industries increased due
to resilient dom estic dem and w hile output of the
construction-related industries contracted due to the slow
construction activities.
G row th in services sector w as sustained at 6.5% , surpassing
the overall G DP grow th rate. G row th w as underpinned by
the strong private consum ption and increased tourism
and increased business activities. The expansion in the
w holesale and retail trade, hotels and restaurants sub-sector
(8% ; 2004: 7.1% ) w as bolstered by strong consum er
spending. Higher spending w as particularly evident during
certain periods of the year w hen there w ere the annual
nationw ide sales and the year-end festivities. In the
interm ediate services, the transport, storage and
com m unication sub-sector expanded at a m oderate pace of
6.3% , reflecting the low er spending of the new but less
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
A nnual change (% )
Graph 1.1
Real GDP, World Trade and Inflation Rate
-10
-5
0
5
10
15
G D P W orld Trade C PI
The estim ates indicate that the econom y w as on a
balanced grow th path in 2005 as potential output
grow th w as sustained at 5.7% . A s a result, the output
gap, (the difference betw een actual and potential
output expressed as a percentage of the potential
output level) w as low at +0.7% . The data also show ed
that the contribution of productivity grow th to total
grow th had im proved, suggesting the gradual shift up
the productivity ladder and the m ore efficient
utilisation of factor inputs (D etails in Box 1).
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 2
3
The Malaysian Economy in 2005
affluent m obile phone subscribers. Although w orld and
regional trade perform ance w as strong in 2005, it slow ed
from the exceptionally strong grow th rates registered in
2004. This coupled w ith the m ore m oderate grow th in the
dom estic m anufacturing sector tem pered the grow th in the
transportation industry. The finance, insurance, real estate
and business services sub-sector recorded a sustained
grow th at 5.4% during the year, as dem and for funds and
other financial and business services increased in tandem
w ith econom ic activity. Furtherm ore, the new business
services such as shared services and outsourcing activities
continued to provide the im petus to grow th in the sector.
Value added in the agriculture sector recorded a m oderate
increase of 2.1% in 2005. Palm oil production w as m arkedly
higher, grow ing by 7% , although higher yields w ere offset
by the w eaker perform ance in the other agriculture activities
including rubber, fisheries and paddy. G row th in the m ining
sector also m oderated (0.8% ) due to low er production of
crude oil, though natural gas output w as substantially
higher. The decline in crude oil production w as a result of
shutdow ns of several oil installation facilities during the year
for m aintenance and repair purposes. In contrast, the
increase in natural gas output w as supported by the strong
dem and from the dom estic pow er generators, industrial
sectors as w ell as foreign buyers. The higher dem and w as
accom m odated by the increased capacity utilization at the
M NLG plants.
Value added in the construction sector contracted for the
second consecutive year (-1.6% ; 2004: -1.5% ) as civil
engineering activities w ere subdued follow ing the
com pletion of several large infrastructure projects in
recent years. H ow ever, the residential and non-residential
segm ents continued to expand due to resilient dem and
for houses and firm interest for office and retail space.
Reflecting the increased dem and, occupancy rates for
office and retail space im proved in 2005. In the
residential sub-sector, continuing incom e grow th and
stable job prospects encouraged dem and from
households. In addition, the low interest rates and
innovative property loans also supported this dem and as
they helped m ake purchases of houses affordable.
A ggregate dom estic dem and rem ained resilient,
grow ing by 7.3% , as the econom y w as able to adjust to
the im pact of the escalating oil prices. The staggered
increm ent of retail petrol prices did not have a disruptive
effect on the cost structure of com panies w ho
continued to register reasonable profit m argins.
Producers had partly absorbed som e of the price
increases and thus m oderated the increase in dom estic
prices. The cost-push increase w as m ainly seen in the
transport and com m unications category w hile the core
inflation rem ained at 2% (2004: 1% ). A s a result,
A nnual change (% )
Graph 1.2
Real GDP and Aggregate Domestic Demand
G D P A ggregate dom estic dem and
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-30
-25
-20
-15
-10
-5
0
5
10
15
20
Percentage
point
A nnual change (% )
Graph 1.3
Contribution to Real GDP Growth
D om estic dem and (LH S)
N et exports (LH S)
C hange in stocks (LH S)
Real G D P grow th (RH S)
-10
-5
0
5
10
15
2000 2001 2002 2003 2004 2005
-10
-5
0
5
10
15
Graph 1.4
Efficiency of Energy Usage
1Q '99 3Q 1Q '00 3Q 1Q '01 3Q 1Q '02 3Q 1Q '03 3Q 1Q '04 3Q 1Q '05 3Q 4Q
0.010
0.012
0.014
0.016
0.018
0.020
0.022
0.024
0.026
Energy consum ption/m anufacturing sales
Source: D epartm ent of Statistics, M alaysia and Tenaga N asional Berhad
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 3
4
Table 1.1: Malaysia Key Economic Indicators
2003 2004 2005p 2006f
Population (m illion persons) 25.3 26.0 26.7 27.2
Labour force (m illion persons) 10.4 10.8 11.3 11.5
Em ploym ent (m illion persons) 10.0 10.5 10.9 11.1
U nem ploym ent (as % of labour force) 3.6 3.5 3.5 3.5
Per C apita Incom e (RM ) 14,870 16,616 18,106 19,484
(U SD ) 3,913 4,373 4,781 5,145
NATIONAL PRODUCT (% change)
Real G D P 5.4 7.1 5.3 6.0
(RM billion) 232.4 249.0 262.0 277.6
A griculture, forestry and fishery 5.6 5.0 2.1 2.0
M ining and quarrying 5.8 3.9 0.8 5.0
M anufacturing 8.4 9.8 4.9 7.0
C onstruction 1.5 -1.5 -1.6 1.0
Services 4.5 6.8 6.5 6.0
N om inal G N P 10.5 14.1 11.3 9.7
(RM billion) 372.5 425.1 473.1 519.1
Real G N P 6.9 7.3 6.4 5.8
(RM billion) 217.2 233.1 248.0 262.5
Real aggregate dem and
1
6.1 7.5 7.3 5.9
Private expenditure
1
5.5 13.1 9.5 7.4
C onsum ption 6.6 10.5 9.2 6.8
Investm ent 0.4 25.8 10.8 10.0
Public expenditure
1
7.2 -2.1 3.1 3.0
C onsum ption 11.5 6.0 5.9 3.2
Investm ent 3.9 -8.7 0.4 2.7
G ross national savings (as % of G N P) 36.5 37.3 37.1 38.1
BALANCE OF PAYMENTS (RM billion)
G oods balance 97.8 104.5 126.5 138.4
Exports (f.o.b.) 398.0 481.2 536.9 601.9
Im ports (f.o.b.) 300.2 376.8 410.5 463.5
Services balance -15.3 -8.8 -10.2 -10.3
(as % of G N P) -4.1 -2.1 -2.2 -2.0
Incom e, net -22.5 -24.5 -21.5 -23.7
(as % of G N P) -6.1 -5.8 -4.5 -4.6
C urrent transfers, net -9.3 -14.6 -17.0 -15.0
C urrent account balance 50.6 56.5 77.8 89.4
(as % of G N P) 13.6 13.3 16.4 17.2
Bank N egara M alaysia international reserves, net
2
44.9 66.7 70.5 -
(in m onths of retained im ports) 6.6 7.9 7.8 -
PRICES (% change)
C PI (2000=100) 1.2 1.4 3.0 3.5 - 4.0
PPI (1989=100) 5.7 8.9 6.8 -
Real w age per em ployee in the m anufacturing sector 2.9 1.9 0.8 -
N ote: Figures m ay not necessarily add up due to rounding.
1
Exclude stocks.
2
A ll assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected
accordingly in the Banks account.
p Prelim inary
f Forecast
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 4
5
The Malaysian Economy in 2005
Table 1.2: Malaysia Financial and Monetary Indicators
2003 2004 2005p
FEDERAL GOVERNMENT FINANCE (RM billion)
Revenue 92.6 99.4 106.3
O perating expenditure 75.2 91.3 97.7
N et developm ent expenditure 38.3 27.5 27.3
O verall balance -20.9 -19.4 -18.7
O verall balance (% of G D P) -5.3 -4.3 -3.8
Public sector net developm ent expenditure 83.3 56.7 71.0
Public sector overall balance (% of G D P) -4.9 4.1 1.4
EXTERNAL DEBT
Total debt (RM billion) 186.7 200.6 195.9
M edium - and long-term debt 153.2 156.8 149.7
Short-term debt
1
33.5 43.7 46.2
D ebt service ratio (% of exports of goods and services)
Total debt 6.4 4.6 4.7
M edium - and long-term debt 6.3 4.4 4.5
Change in 2003 Change in 2004 Change in 2005
RM billion % RM billion % RM billion %
MONEY AND BANKING
M oney supply M 1 13.0 14.6 12.2 11.9 9.8 8.5
M 2 42.5 11.1 108.1 25.4 82.0 15.4
M 3 48.5 9.7 68.0 12.4 49.7 8.0
Banking system deposits 49.5 9.8 70.1 12.7 68.6 11.0
Banking system loans
2
21.6 4.8 40.1 8.5 44.2 8.6
M anufacturing -0.2 -0.3 1.9 3.2 -2.4 -3.7
Broad property sector 14.6 8.4 19.7 10.5 20.5 9.9
Finance, insurance and business services -0.6 -2.1 1.7 5.7 -0.8 -2.6
Loan-deposit ratio (end of year) 80.9% 78.4% 77.5%
Financing-deposit ratio
3
91.7% 87.7% 85.8%
2003 2004 2005
% % %
INTEREST RATES (AVERAGE RATES AS AT END-YEAR)
O vernight Policy Rate (O PR) - 2.70 3.00
Interbank rates
3-m onth 2.87 2.80 3.20
C om m ercial banks
Fixed deposit 3-m onth 3.00 3.00 3.02
12-m onth 3.70 3.70 3.70
Savings deposit 1.86 1.58 1.41
Base lending rate (BLR) 6.00 5.98 6.20
Treasury bill (3-m onth) 2.77 1.96 2.96
G overnm ent securities (1-year) 2.93 2.24 3.30
G overnm ent securities (5-year) 4.28 3.64 3.73
2003 2004 2005
% % %
EXCHANGE RATES
M ovem ent of Ringgit (end-period)
C hange against SD R -8.5 -4.3 8.9
C hange against U SD
4
0.0 0.0 0.5
1
Excludes currency and deposits held by non-residents w ith resident banking institutions.
2
Includes loans sold to C agam as.
3
A djusted to include holdings of private debt securities.
4
Ringgit w as pegged at RM 3.80=U SD 1 on 2 Septem ber 1998 and shifted to a m anaged float against a basket of currencies on 21 July 2005.
p Prelim inary
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 5
6
Potential Output of the Malaysian Economy
Potential output is the trend level of output that is consistent w ith the aggregate productive capacity of an
econom y. It traces the sustainable grow th path of the econom y. C onceptually, the grow th in potential output is
prim arily determ ined by the expansion and non-inflationary utilisation of physical capital and the labour force, as
w ell as total factor productivity (TFP) grow th. TFP grow th captures productivity increase arising from im provem ents
in the utilisation of factor inputs due to technological progress and overall efficiency im provem ent. Therefore, the
sustainability of long-term grow th of an econom y depends not just on factor accum ulation but also crucially on
im provem ents in skills, capital efficiency, the overall econom ic environm ent, as w ell as technological progress.
1
The output gap is the difference betw een the levels of actual and potential output and the gap is m easured as a percentage of potential output. A positive output
gap indicates that actual output is above potential output, w hile a negative output gap indicates the reverse.
0
60
120
180
240
300
% of potential
output
Graph 1
Actual and Potential Output
93 94 95 96 97 98 99 00 01 02 03 04 05 06
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
RM billion
A ctual O utput (G D P)
Potential O utput
O utput G ap (RH S)
Table 1
Actual GDP and Potential Output
A ctual Potential
Investm ent Labour
O utput
G D P O utput G ap
Period (% of
potential
output)
1994-1998 5.8 7.3 2.7 3.1 0.9
1999 6.1 1.0 -6.5 3.7 -3.1
2000 8.9 6.4 25.7 4.3 -0.1
2001 0.3 3.3 -2.8 1.6 0.0
2002 4.4 2.8 0.3 3.5 -0.8
2003 5.4 4.8 2.7 3.6 -0.4
2004 7.1 5.8 3.1 4.0 0.7
2005e 5.3 5.7 4.7 4.1 0.7
e Estim ates
(A nnual change in % )
0
1
-1
2
3
4
5
6
7
8
% point contribution
Graph 2
Factor Contributions and TFP Growth
1994-1997 1998-1999 2000-2002 2003-2005
Labour C apital TFP
The latest estim ates for M alaysia show that potential output grew at 5.7% in 2005, w ith the output gap
1
estim ated
at positive 0.7% of potential output. This indicated that the M alaysian econom y w as operating slightly above its
potential in 2005. O verall, the period corresponding to the 8
th
M alaysia Plan (2001-2005) w as characterised by
relatively balanced grow th, w ith the econom y expanding close to its potential capacity. Am idst a backdrop of a
recovering capital stock, potential output grew at an average annual rate of 4.6% com pared w ith 4.5% for actual
output during this period. The output gap, w hich captures the extent to w hich the econom y is deviating from the
non-inflationary trend of output, w as on average less than 1% of potential output. Despite num erous external
shocks to the region and the grow ing global im balances during this period, the econom y did not experience any
large deflationary or inflationary cycles, indicating M alaysias grow ing econom ic resilience.
The period of 2001-2005 also w itnessed a transition of the M alaysian econom y in term s of factor contributions and
the general level of econom ic efficiency. As show n in G raph 2, the grow th in potential output w as driven m ainly by
the accum ulation of capital in the early 1990s, w ith m oderate contributions from labour and TFP grow th. How ever,
beginning 1997, the contribution from capital accum ulation began to decline and from 2001, TFP grow th started to
im prove. This shift suggests that M alaysia has been m oving from a factor-driven to a productivity-driven econom y.
G oing forw ard, potential output of the econom y is
expected to grow at a pace of 6% in 2006 w ith
the positive output gap closing tow ards the end of
the year due to the continuous im provem ent in
productivity and expansion of both capital stock
and labour force. This trend of a balanced
expansion of the M alaysian econom y is expected
to be sustained into the future, given the
continued upw ard trend in productivity and
increased resilience.
C01 Malaysian Economy pg02-27 4/14/06, 11:58 6
7
The Malaysian Economy in 2005
inflation w hich peaked at 3.7% in A ugust, w as low er
than the increase in com m odity prices. M ore im portantly,
higher energy prices also appeared to have increased the
pace of transform ation tow ards greater efficiency and
drive for higher productivity in order to m inim ize costs,
thereby helping to contain inflation at m anageable levels.
The data indicates a dow nw ard trend in the energy
intensity of the m anufacturing sector.
Private consum ption increased at a strong pace of 9.2%
as positive developm ents in the econom y, in particular,
the increase in job vacancies, rising disposable incom es
and the accom m odative financing conditions supported
the grow th. W hile consum ers w ere affected by higher
fuel prices, there w as a w illingness to m oderate their
savings rate in order to m aintain their level of
consum ption, further underscoring their confidence on
incom e grow th and positive outlook for the econom y.
Reflecting this confidence, the M alaysian Institute of
Econom ic Research (M IER)s C onsum er Sentim ents Index
rem ained over the 100-point threshold throughout 2005,
rising to 116.1 by end-year. In addition, the G overnm ent
took active m easures, follow ing the adjustm ent in
adm inistered prices by reinstating allow ances to m itigate
the increase in the cost of living and reducing road taxes
on sm aller vehicles used by the low er-incom e group.
Private investm ent registered a strong grow th of 10.8% in
2005 as com panies expanded their capacity, upgraded and
replaced old and obsolete m achinery. Although volatile
energy prices m ay have increased the firm suncertainty
regarding the outlook for aggregate dem and, this w as
balanced by positive factors, particularly the strengthening
of the electronics cycle in the second half of the year as w ell
sustained strength in dom estic dem and. Higher capital
expenditure w as seen in all sectors of the econom y w ith
services, m ining and m anufacturing sectors recording strong
increases in capital expenditure. In contrast, the capital
spending in the construction sector declined as a result of
the end of the construction of several privatized roads.
W hile external dem and expanded at m ore m oderate pace
com pared to 2004, its contribution to grow th turned
positive in 2005 (1.5 ppt; 2004:-2.5 ppt). The positive
contribution to grow th w as prim arily due to exports
grow ing (11% ) at a faster rate than im ports (8.5% ). The
expansion in exports w as m ore subdued than in 2004 as a
result of the softening of the IT sector, w hich w as felt at the
beginning of the year. Exports of prim ary com m odities
how ever rem ained strong (16% , 2004: 21.8% ) reflecting
the higher prices of crude oil and liquefied natural gas
(LNG ). M alaysian crude oil, w hich is of the light sw eet,
grade com m ands a prem ium over the heavy and sour
crude grade.
Im port grow th m oderated to 8.5% (2004: 26.4% ), resulting
in a larger trade surplus. The slow er grow th in im ports of
interm ediate goods reflected the subdued perform ance of
the E&E sector. As a result, the trade surplus w idened to
RM 99.8 billion (2004: RM 80.7 billion).
The services account recorded a larger deficit of RM 10.2
billion (2004: -RM 8.8 billion) as the sm aller deficit in the
transportation account w as offset by higher paym ents
for travel abroad as w ell as a higher deficit in the other
services account. Sim ilarly, the incom e account also
recorded a deficit in 2005, albeit sm aller than in 2004 (-
RM 21.5 billion; 2004: -RM 24.5billion). O utflow s of profits
and dividends accruing to foreign investors w as partly
offset by higher receipts from earnings accruing to
M alaysian investors abroad as w ell as higher returns on the
external reserve holdings. The com bined effects of a w ider
trade surplus w ith a sm aller incom e account deficit resulted
in a higher current account surplus of 16.4% of G NP, the
highest level achieved since 1999 (2004: 13.3% ).
G iven its strong fundam entals and the structural changes
taking place in the region, Bank Negara M alaysia adjusted
the exchange rate regim e on 21 July 2005, m oving from a
pegged exchange rate against the US dollar to a m anaged
float. The m ore flexible regim e allow s M alaysia to respond
to changes in the international and dom estic environm ent.
The ringgit since appreciated to reach 3.7460 to the US
dollar before closing the year at 3.78. Reflecting M alaysias
strong external conditions, the rate has continued to
im prove further to 3.7055 in 3 M arch 2006.
Speculative portfolio investm ent, w hich flow ed in at the
beginning of the year in anticipation of an appreciation of
the ringgit, w as unw ound in the second half of the year.
The portfolio flow s have subsequently returned to norm al
levels in an orderly price discovery process. Apart from the
portfolio funds, the larger repaym ent of external loans by
the public sector and larger extension of trade credits by
M alaysian exporters also contributed to the outflow s in the
financial account during the period. As a result of these
outflow s, the financial account recorded a net outflow of
RM 42 billion in 2005 (2004: +RM 15.1 billion).
O n a gross basis, foreign direct investm ent (FD I)
increased to RM 25 billion (2004: RM 23.5 billion), or
5.3% of G N P. The FD I inflow s w ere seen m ainly in the
services, oil and gas and m anufacturing sectors. In the
services sector, the FD I inflow s w ere broad based,
channeled m ainly into the finance, insurance and
business services as w ell as restaurants, hotels,
w holesale and retail sub-sectors. Reflecting the
increased interest by M alaysian com panies to diversify
abroad, outflow s for overseas investm ent also increased.
C01 Malaysian Economy pg02-27 4/14/06, 13:58 7
8
The current account surplus rem ained and m ore than
offset the net outflow in the financial account and
foreign exchange revaluation losses arising from the
strengthening of ringgit against the m ajor currencies. A s
such, the international reserves increased further to
RM 266.3 billion or equivalent to U SD 70.5 billion at end
2005. By 28 February 2006, the international reserves
level rose further to RM 272.7 billion or U SD 72.2 billion,
adequate to finance 7.6 m onths of retained im ports and
is 6.7 tim es the short-term external debt.
M alaysias external debt declined to RM 195.9 billion in
2005 (2004; RM 200.6 billion), reflecting m ainly the
higher repaym ent of external loans by both the Federal
G overnm ent and the non-financial public enterprises
(N FPEs). The repaym ents by the Federal G overnm ent
m arked the m aturity of a Euro bond issued in 2000 and
som e scheduled principal repaym ents of syndicated
loans w hile in the case of the N FPEs, the m aturity of U S
dollar-denom inated bonds as w ell as prepaym ents of
several loans. In contrast, the slight increase in short-
term debt w as due m ainly to the increase in short-term
debt of the banking sector arising from hedging
activities on trade-related transactions and treasury
activities. M alaysias external debt position rem ains
sustainable w ith the debt service ratio holding steady at
4.7% w ith its ratio to G N P declining to 41.4% (2004:
47.2% ). Further, the short-term debt rem ained low ,
accounting for only 23.6% of total external debt.
In an environm ent of econom ic expansion and
m acroeconom ic stability, financial sector soundness
continued to im prove. C apitalisation rem ained strong,
accom panied by continued grow th in profits and in the
quality of loan portfolios. The capital position of the
banking system rem ained strong w ith the risk-w eighted
capital ratio (RW C R) and core capital ratio (C C R) at
13.1% and 10.2% respectively (2004: 14.4% and
11.4% respectively). In addition, the im provem ents in
the asset quality of the banking system w ere evident,
w ith the 6-m onth net non-perform ing loan (N PL) ratio
im proving to 4.6% (2004: 5.8% ) w hile the 3-m onth net
N PL im proved to 5.8% (2004: 7.5% ).
Macroeconomic Management
The prudent m acroeconom ic m anagem ent by the
G overnm ent further enhanced fundam entals of the
M alaysian econom y in 2005. The current account in the
balance of paym ents rem ained in surplus, savings
rem ained high, reserves increased, inflation rem ained at
m anageable levels and the external debt declined. In this
context of sustained grow th perform ance and
fundam entals, the G overnm ents continued com m itm ent
to strengthen its budgetary position w as reflected in the
narrow ing of its budgetary deficit to 3.8% in 2005 from
4.3% of G D P in 2004. The G overnm ents focus w as on
reallocating resources to sm aller projects particularly in
agriculture, construction, housing and for infrastructure
developm ent in rural areas. This progressive reduction in
the deficit w ould provide the policy flexibility for the
G overnm ent to m itigate potential adverse effects from
uncertainties in the external sector. The G overnm ent
recognised the need to help m itigate the higher
international oil prices w hile ensuring price signals w ere
transm itted efficiently, thus allow ing econom ic agents to
m ake the necessary adjustm ents to these developm ents.
In 2005, the G overnm ent rem oved the price subsidies
gradually, w hile in early 2006, a further adjustm ent w as
m ade to fuel prices effective 28 February. In order to
im prove predictability and allow agents to plan ahead,
the G overnm ent also announced that no further
adjustm ents w ould be m ade in 2006.
Macroeconomic management
in 2005 focused on sustaining
economic growth while
improving the capacity of the
economy to generate
sustainable growth.
In m anaging the econom y, public policy in 2005 focused
on accelerating the shift tow ards higher value-added
activities, strengthening the business environm ent to
develop new sources of grow th and enhancing
com petitiveness. In Budget 2005, the incentive structure
w as enhanced further to prom ote investm ent,
particularly in new areas in the agriculture,
m anufacturing and services sectors, w hile efforts at
im proving the delivery system w ere intensified. In
particular, the N ational Biotechnology Policy (N BP) w as
launched on 28 A pril 2005, to be im plem ented in three
phases over 15 years. The objectives of N BP are to
prom ote the establishm ent of new com panies in order
to develop the sector. W hen fully im plem ented, the
biotechnology industry is expected to contribute up to
5% of G D P and provide strong links to upstream
activities, m ost notably agriculture and m anufacturing.
A nother im portant initiative taken w as the setting up of
the Tax Review Panel to ensure a m ore efficient tax
system that is business-friendly and provides greater
clarity and transparency.
To further enhance and prom ote the activities by sm all-
and m edium enterprises (SM Es), the N ational SM E
D evelopm ent C ouncil, w hich is chaired by the Prim e
M inister and w ith Bank N egara M alaysia acting as the
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 8
9
The Malaysian Economy in 2005
Secretariat, announced new initiatives to accelerate SM E
developm ent. New trade financing products w ere
introduced; SM E info portal and online training portal w ere
launched; a com prehensive definition for SM Es in various
sectors for targeted developm ent w as released; and a
fram ew ork for SM E Developm ent Planning and Evaluation
w as developed. The Council also endorsed the National
SM E Developm ent Blueprint 2006, w hich includes a total
of 245 program m es in all sectors to accelerate the
developm ent of SM Es. An allocation of RM 3.9 billion has
been com m itted by the G overnm ent to im plem ent these
program m es. The SM E Bank com m enced operations on 3
O ctober 2005 to prom ote and expand SM Es contribution
to the econom y. The SM E Bank specialises in providing
both financial and non-financial assistance, including
m eeting business advisory needs, and providing education
and training to SM Es. To further prom ote M alaysias export
of goods and services, the functions of M alaysia Export
Credit Insurance Bhd (M ECIB) has been absorbed by the
Export Im port Bank of M alaysia, in an effort to further
im prove the facilities for M alaysian exporters to enhance
their com petitiveness in the global m arket.
Development of Small and Medium Enterprises
The developm ent of com petitive sm all and m edium enterprises (SM Es) is an im portant focus of G overnm ent
policy. The efforts are aim ed at:
strengthening enabling infrastructure for SM E developm ent;
building the capacity and capability of SM Es; and
enhancing access to financing by SM Es.
The N ational SM E D evelopm ent C ouncil
1
has provided the strategic direction for the G overnm ent policies on
SM E developm ent so as to ensure coordination and effectiveness of G overnm ent program m es for SM Es.
(i) Strengthening Enabling Infrastructure for SME Development
(a) Framework for SME Development Planning and Evaluation
In view of the extensive SM E program m es undertaken by a large num ber of M inistries and Agencies, it is
im portant to ensure that the im plem entation of these program m es are coordinated and effective in
developing the SM Es. A Policy Form ulation and Evaluation Fram ew ork has been introduced to enhance the
form ulation and coordination of SM E policies and program m es, as w ell as to m onitor the im plem entation and
outcom es of the program m es. The Fram ew ork involves the identification of
broad strategic priorities, program m es and targets for SM E developm ent, as w ell as the establishm ent of
com prehensive key perform ance indicators to evaluate effectiveness of the program m es on an annual basis.
(b) National SME Development Blueprint 2006
Follow ing the adoption of the Fram ew ork for SM E D evelopm ent Planning and Evaluation, the N ational
SM E D evelopm ent Blueprint for 2006 (Blueprint 2006) w as endorsed by the C ouncil in D ecem ber
2005. The Blueprint 2006 is a one-year action plan of the G overnm ent to prom ote the developm ent
of SM Es. It outlines the follow ing:
O bjectives and targets for SM E developm ent in 2006;
Key strategies, program m es and financial com m itm ents; and
M inistries and A gencies involved in im plem enting these program m es.
For 2006, a total of 245 program m es involving financial com m itm ent of RM 3.9 billion have been
identified for im plem entation to accelerate the developm ent of SM Es. These are aim ed at strengthening
the enabling infrastructure to support SM E developm ent; building the capacity and capability of SM Es;
and enhancing SM Esaccess to financing. The program m es w ill cover all sectors, including SM Es in
agriculture and agro-based industries, and those involved in know ledge-based industries. Efforts w ill also
be directed to developing progressive and resilient Bum iputera entrepreneurs and SM Es.
1
The N ational SM E D evelopm ent C ouncil is chaired by the Prim e M inister and com prises of M inisters and H eads of 18 key M inistries and A gencies involved in SM E
developm ent.
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 9
10
A total of 170 key program m es w ill be im plem ented to build capacity and capability of SM Es, m ainly
in the areas of entrepreneurial and hum an resource developm ent, as w ell as m arketing and
prom otion. These include program m es to inculcate entrepreneurship at schools and institutes of
higher learning, as w ell as initiatives to assist SM Es in expanding their m arket netw ork, through
m arket expansion program m es and developing linkages w ith large corporations, governm ent-linked
com panies and hyperm arkets.
Forty-tw o key program m es w ill be im plem ented to strengthen the infrastructure to support SM E
developm ent, w hich include incentives to encourage SM Es to upgrade their business prem ises as w ell
as establishm ent of incubation centres. For greater access to financing, 33 key program m es w ill be
im plem ented in 2006. These include the establishm ent of a RM 300 m illion venture capital fund for
agriculture, an additional RM 300 m illion allocation for the Fund for Food, pre-seed funding for the IC T
sector and the transform ation of the C redit G uarantee C orporation Berhad to further strengthen the
infrastructure for SM E financing.
(c) Adoption of Definitions for SMEs in Malaysia
A ll M inistries, A gencies and financial institutions involved in the developm ent of SM Es have adopted the
new definitions of SM Es in the prim ary agriculture, m anufacturing, m anufacturing-related services and
PROMOTING DEVELOPMENT OF COMPETITIVE AND RESILIENT SMEs IN ALL
SECTORS TOWARDS INCREASING THEIR CONTRIBUTIONS TO THE ECONOMY
Overview of SME Development: Objectives, Strategies, Key Programmes
and Financial Commitment in 2006
Developing
progressive & resilient
Bumiputera
SMEs &
entrepreneurs
Promoting
development of SMEs
in knowledge-based
industries
Enhancing
viability of SMEs
across all
sectors
Socio-Economic Economic
Targets
41 Key Program m es
(N ew : 15)
RM 1.61 b across 11
M inistries
Financial C om m itm ent of RM 2.29 b
across 9 M inistries
K
e
y

P
r
o
g
r
a
m
m
e
s
S
t
r
a
t
e
g
i
c

T
h
r
u
s
t
s
O
b
j
e
c
t
i
v
e
s
Building capacity
and capability
Strengthening enabling
infrastructure
Enhancing access
to financing
98 Key Program m es
(N ew : 3)
106 Key Program m es
(N ew : 13)
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 10
11
The Malaysian Economy in 2005
services sectors. The definitions are based on the criteria of annual sales turnover or num ber of full-tim e
em ployees. The adoption of a com m on identifier for SM Es in these sectors w ill facilitate the identification
of issues and prospects of the sectors concerned to enable appropriate policy actions to be taken. It w ill
also allow for closer m onitoring of SM E perform ance and contribution to the econom y.
(d) Profile and Contribution of SMEs to the Economy
The availability of relevant data on the developm ent and perform ance of SM Es is critical to facilitate
the form ulation of effective policies to support the creation and grow th of SM Es. A s a result, the
C ensus of Establishm ent and Enterprise for the agriculture, m anufacturing and services sectors w as
launched in M arch 2005, covering about 1.7 m illion com panies and businesses. A t end-D ecem ber
2005, 492,806 com pleted responses w ere received. A prelim inary assessm ent of responses from
349,617 com panies and businesses (including large enterprises) highlighted the follow ing:
O f the 349,617 establishm ents, 99% or 346,211 respondents are SM Es (including
m icroenterprises). O f this, 81% are m icroenterprises operating w ith less than 5 full-tim e
em ployees, w hile 17% and 2% are sm all and m edium enterprises respectively; and
The SM Es contributed to 38% of total output and accounted for 55% of total w orkforce of these
349,617 business establishm ents.
The prelim inary findings reinforced the need for aggressive efforts to be undertaken in a strategic and
coordinated m anner to support the expansion of SM Es and strengthen their capacity and
com petitiveness, given the potential for them to contribute m ore effectively to the nations econom y.
A detailed analysis of the profile and perform ance of SM Es w ill be provided in the first A nnual Report
on SM E D evelopm ent 2005, scheduled to be released in June 2006.
(ii) Building Capacity and Capability of SMEs
(a) SMEinfo Portal: A One-Stop Online Information Gateway for SMEs
The SM Einfo Portal (w w w .sm einfo.com .m y), launched in January 2006, is a one-stop online
inform ation gatew ay to provide com prehensive inform ation on all aspects of SM E developm ent. The
SM Einfo Portal provides SM Es w ith convenient access to inform ation on G overnm ent support and
developm ent program m es, financing, advisory services and training program m es. In addition, the
Portal also provides links to relevant w ebsites that contain useful inform ation for SM Es, including
w ebsites of financial institutions. A n im portant feature of the Portal is the free SM E D irectory, w hich
offers an opportunity for SM Es to advertise their com panies and products to large potential custom ers.
(b) Online Training Portal for SMEs
To facilitate SM Es to obtain inform ation and register for training, the H um an Resource D evelopm ent
Portal (H RD Portal), a w eb-based training portal developed by Pem bangunan Sum ber M anusia Berhad,
w as launched in M arch 2005. The H RD Portal, w w w .hrdportal.com .m y, w ill assist em ployers to search,
identify and register for training program m es online, and at the sam e tim e, allow training providers to
offer their training program m es and activities online. By providing access to a central pool of training
inform ation, the H RD Portal w ill facilitate and encourage em ployers, particularly SM Es, to retrain and
upgrade the skills of their em ployees in order to enhance productivity and com petitiveness.
(c) Publication of Annual Report on SME Development
A report on SM E developm ent, that w ill provide a com prehensive assessm ent on the status and
perform ance of SM Es in all sectors, as w ell as details and achievem ents of the G overnm ents
program m es for SM Es, w ill be published every year. The publication is part of the initiatives to enhance
the dissem ination of inform ation on SM Es, and therefore, increase the aw areness am ong SM Es and
others on the status of SM E developm ent and program m es to support SM Es. The A nnual Report on
SM E D evelopm ent 2005 is scheduled for release in June 2006.
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 11
12
(iii) Enhancing Access to Financing by SMEs
Banking institutions are the largest provider of financing to SM Es. In 2005, the banking system approved
RM 35.8 billion of new loans to m ore than 85,000 SM E accounts, representing an increase of 13.1% from
2004 (2004: RM 31.6 billion; 92,000 SM E accounts). Loan disbursem ents grew by 10.2% to RM 110.7 billion
(2004: RM 100.4 billion), w hile loans outstanding to SM Es expanded by 8.7% to RM 96 billion as at end-2005
(end-2004: RM 88.3 billion). Loans to SM Es accounted for 42.6% of business loans outstanding as at end
2005, com pared w ith 40.3% as at end 2004. O n a sectoral basis, lending to SM Es w as diversified, w ith
alm ost tw o-thirds being channelled to distributive trade, m anufacturing and construction sectors. G ross non-
perform ing loans (N PLs) of SM Es declined m arginally to RM 10.2 billion and the gross N PL ratio declined to
10.6% (end-2004: RM 10.6 billion; 12% ).
A num ber of developm ent financial institutions (D FIs) also provide financing to SM Es. In 2005, the D FIs
approved RM 2.3 billion of loans to 5,223 SM E accounts (2004: RM 2.4 billion to 5,397 SM E accounts), and
disbursed RM 1.5 billion (2004: RM 1.2 billion). The loans outstanding of D FIs to SM Es increased by 3.3%
to RM 3.1 billion as at end-2005 (end-2004: RM 3 billion). A nother source of financing for SM Es is the
leasing and factoring com panies, w hich provide an alternative m ode of financing to finance equipm ent
and w orking capital requirem ents. In 2005, RM 819 m illion of financing w as extended by leasing and
factoring com panies to businesses in services, m anufacturing and general com m erce sectors (2004:
RM 996 m illion). For new ly established businesses, especially in the IC T sector, financing could also be
obtained from venture capital com panies. The total available funds for venture capital investm ents
increased by 14.3% to RM 2.6 billion as at end-2005 (end-2004: RM 2.3 billion). The funds w ere invested
in 380 com panies as com pared w ith 332 com panies as at end-2004.
Special Funds for SMEs
Bank N egara M alaysia has five special funds to assist SM Es to have access to financing at reasonable costs
(lending rates ranging from 3.75% to 5.00% ). The funds are channeled through participating institutions
com prising banking institutions, D FIs and ERF Sdn. Bhd.:
Fund for Sm all and M edium Industries 2 (fund size: RM 4.75 billion);
N ew Entrepreneurs Fund 2 (fund size: RM 2.35 billion);
Fund for Food (fund size: RM 1.3 billion);
Rehabilitation Fund for Sm all Businesses (fund size: RM 200 m illion); and
Bum iputera Entrepreneurs Project Fund (fund size: RM 300 m illion).
D ue to strong dem and, allocations for the Fund for Sm all and M edium Industries 2 and N ew Entrepreneurs
Fund 2 had been increased in 2005 by RM 250 m illion and RM 350 m illion to RM 4.75 billion and RM 2.35
billion respectively.
Initiatives to Improve Access to Financing by SMEs
The policy on enhancing access to financing by SM Es during the year continued to focus on:
Strengthening the existing infrastructure to ensure a m ore effective interm ediation of funds to SM Es;
The provision of advisory support and aw areness program m es; and
A ssisting in debt restructuring of financially distressed SM Es w ith viable business.
A m ong the new initiatives introduced in 2005 are:
(a) Transformation of Credit Guarantee Corporation Malaysia Berhad
O ne of the initiatives to strengthen the infrastructure of SM E financing is the transform ation of Credit
G uarantee Corporation M alaysia Berhad (CG C) involving the enhancem ent of its role and expansion in the
range of products and services offered by CG C. In enhancing SM Esaccess to financing, CG C w ill take a
holistic approach by providing w ider range of credit enhancem ent products, advisory services on financial
and business developm ent, and credit inform ation services. These services are aim ed at facilitating greater
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 12
13
The Malaysian Economy in 2005
lending to SM Es w hile prom oting sound financial m anagem ent practices by SM Es. To m eet its new
expanded role, the com position of the Board of CG C has been broadened to include m em bers w ith
experience in business and finance, w hile efforts are being taken to strengthen the resources of CG C.
(b) Venture Capital for Agriculture Sector
To support the G overnm ents objective of realising the potential of the agriculture sector as the third engine of
grow th, Bank Negara M alaysia is establishing tw o venture capital funds of RM 150 m illion each for the
agriculture sector in 2006. The objective of the funds is to create and develop an integrated agricultural
business through the provision of venture capital financing, as w ell as technical and business support, w ith its
spill over effects that w ill benefit and enhance the w hole value chain of the agriculture sector. The targeted
areas for investm ents are integrated farm ing and fisheries, as w ell as biotechnology-related ventures.
(c) Establishment of the SME Bank
The SM E Bank com m enced operations on 3 O ctober 2005 as a result of integration and
rationalisation exercise betw een Bank Pem bangunan dan Infrastruktur M alaysia Berhad and Bank
Industri & Teknologi M alaysia Berhad, to support the developm ent of the SM E sector. The SM E Bank
w ill com plem ent the banking institutions through the provision of financial and business support
services to the SM Es. These include equity financing, w orking capital, term loans, industrial hire
purchase, leasing, factoring, contract financing as w ell as bank guarantees. In addition, the SM E
Bank w ill also provide business and consultancy support services, such as advisory services and
preparation of business plans.
(d) New Trade Finance Products for SMEs
Tw o new trade finance products for SM Es w ere introduced in January 2006, nam ely the M ulti Currency
Trade Finance (M CTF) and Indirect Exporter Financing Schem e (IEFS), under both conventional and Islam ic
financing. These products are aim ed at encouraging SM Es to export their goods and services, particularly to
the non-traditional m arkets such as m em bers of the O rganisation of Islam ic Countries. The M CTF provides
financing to M alaysian direct exporters in Ringgit and m ajor foreign currencies in the form of pre and post
shipm ent financing. The IEFS provides Ringgit financing to indirect exporters w ithout recourse, w hereby the
participating banks w ill discount their trade invoices arising from the supply of goods and services to direct
exporters. These products benefit the SM Es by low ering financing costs, w ithout collateral requirem ents.
Under the arrangem ents, the SM Es can obtain financing from the participating banks, w ith the credit risks
being shared betw een the bank and Export-Im port Bank of M alaysia Berhad.
Financial Advisory Service
Bank N egara M alaysia provides financial advisory services to SM Es in the follow ing areas:
inform ation on various sources of financing;
assistance in facilitation of loan application process; and
advice on financial requirem ents and problem s of SM Es.
In 2005, the num ber of enquiries and assistance sought by SM Es increased to 4,019 cases (2004:
1,399 cases) reflecting heightened aw areness am ong SM Es as w ell as a result of the establishm ent
of Lam an Inform asi, N asihat dan Khidm at (LIN K), in Bank N egara M alaysia, Kuala Lum pur. O f these,
81% w ere enquiries on special funds provided by the G overnm ent and advice on loan m atters, and
19% w ere com plaints against financial institutions, m ainly for cases of loan rejection and poor
response on SM Esloan applications.
Performance of Small Debt Resolution Scheme
The Sm all D ebt Resolution Schem e w as established on 1 N ovem ber 2003 to facilitate the restructuring of
non-perform ing loans (N PLs) of SM Es w ith on-going business. U nder the m echanism , a Sm all D ebt
Resolution C om m ittee undertakes independent assessm ents on the viability of the businesses, loan
restructuring and financing requirem ents of the SM Es.
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 13
14
A s at end-2005, 394 applications w ith N PLs of RM 278 m illion w ere received under the schem e (end-2004:
228 applications w ith N PLs of RM 180.2 m illion). O f these, 286 applications, involving N PLs of RM 183
m illion, have been approved for restructuring and RM 16 m illion new financing w as approved under the
Rehabilitation Fund for Sm all Businesses. A total of 83 cases, w ith total N PLs of RM 83 m illion, w ere
rejected due to non-viability. A nother 25 cases involving N PLs of RM 12 m illion are being evaluated as
som e of the cases could not be processed due to the inability of applicants to provide the necessary
inform ation required to facilitate evaluation. The perform ance of the schem e has show n that the
restructuring of N PLs is m ore im portant than the provision of new financing in ensuring the viability and
sustainability of financially distressed SM Es.
In addition to new initiatives, the G overnm ent
im plem ented further new m easure to im prove delivery
system and quality of services. A num ber of custom er
service offices and one-stop centres w ere established,
leveraging on IC T to expand public sectors reach and
response tim e to investors, businesses and consum ers.
M oving forw ard, the 2006 Budget put forth various pro-
active m easures to enhance national resilience and the
ability to face external challenges, arising from higher oil
prices, higher global interest rates and increasing global
com petition. Incentives have been given to develop new
grow th areas such as biotechnology, high technology
m anufacturing and IC T industries. The N ational Biofuel
Policy w as launched at the end of 2005 to encourage
private sector involvem ent in the production of
biodiesel. In term s of special developm ent funds, the
G overnm ent has announced an increase of RM 300
m illion for the Fund for Food; the creation of M alaysian
Life Sciences C apital Fund for investm ent in
biotechnology w ith RM 100 m illion contribution from
the G overnm ent; and an RM 1 billion fund to assist and
encourage local entrepreneurs, especially bumiputeras,
to venture abroad via facilities such as trade financing,
overseas projects financing and credit insurance
guarantee. In addition, selected com panies undertaking
IC T and m ultim edia services w ill be given Pioneer Status,
w hich allow s for tax exem ption or tax allow ances of up
to 50% for five years. The G overnm ent increased the
pace of developing the M ultim edia Super C orridor
(M SC ) by aw arding the status to cybercities of Bayan
Lepas, Pulau Pinang and the Kulim H igh Technology
Park in Kedah. The G overnm ent also continues to
support the developm ent of soft infrastructure by
providing a large allocation to the education and
training sector, focusing on developing skills in order to
increase productivity and value-add from the w orkforce.
The overall m otivation of m acroeconom ic m anagem ent of
M alaysia is the policy of pursuing balanced grow th in an
environm ent of social and political stability. At end-M arch
2006, the G overnm ent w ill launch the Ninth M alaysia Plan
(9M P), 2006-2010, w hich provides the foundation for
further developm ent and strengthening the prospects for
the M alaysian econom y. The Plan w ill also focus on the
im portance of m aking progress in the new grow th areas in
order to achieve the successful transform ation of M alaysia
into a m ore resilient know ledge-based econom y, w hile re-
em phasising the G overnm ents com m itm ent to
m aintaining m acroeconom ic stability.
The m onetary policy stance in 2005 aim ed to prom ote
sustainable grow th in an environm ent of price stability.
In form ulating the stance of m onetary policy, Bank
N egara M alaysia undertakes a careful assessm ent of the
risks to inflation and econom ic grow th. In 2005, a
particular challenge w as to respond appropriately to the
higher oil prices, recognising that price increases arose
due to a m ultitude of factors w ith cost-push factors
being dom inant. Follow ing the increases in
transportation charges and retail prices of petrol and
diesel in M ay, the inflation rate breached the 3% level.
D em and-driven inflation, as m easured by core inflation,
w as how ever w ell contained and registered a m ore
gradual increase in the first half of the year. Real and
m onetary indicators did not suggest that dem and
pressures w ere a source of inflationary concern. G row th,
w hich had been high at 6.2% in the first quarter, had
also slow ed to 4.4% in the second quarter.
C onsum ption and investm ent activity appeared to hold
steady w hile financing activities and m oney supply
continued to increase at relatively stable rates. In the
second half of the year, the grow th m om entum picked
up, w ith private sector dem and grow th becom ing m ore
entrenched. In the third quarter, real G D P grow th
accelerated to 5.3% , w ith the outlook for external
dem and becom ing m ore optim istic. G row th in the
global econom y had rem ained relatively resilient to the
higher oil prices w hile the sem iconductor dow n-cycle
had reached its trough by m id-year, w ith global sales
and shipm ents picking up thereafter. C onsequently, the
O vernight Policy Rate (O PR) w as raised by 30 basis
points to 3% on 30 N ovem ber 2005 to align the rates
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 14
15
The Malaysian Economy in 2005
to the prevailing m onetary conditions. A t 3% , the O PR
continued to rem ain below its neutral level, and
therefore, continued to rem ain supportive of econom ic
activity. W ith the release of the fourth quarter G D P
data, w hich show ed that the grow th m om entum w as
sustained at 5.2% w hile the underlying pressure on
prices rem ained strong, Bank N egara M alaysia raised the
O PR by another 25 basis points on 22 February 2006.
The institutional fram ew ork for developing,
im plem enting and com m unicating m onetary policy w as
further enhanced in 2005. Starting in D ecem ber 2005,
the M onetary Policy C om m ittee (M PC ) decided that the
M onetary Policy Statem ent (M PS) w ould be issued after
every M PC M eeting, further enhancing the transparency
in com m unicating m onetary policy. The D ecem ber
announcem ent also included the schedule of M PC
m eetings for 2006. This w ould allow m arket
participants to better anticipate and understand Bank
N egara M alaysias policy stance and direction.
O n the external front, there w as an increase in net
portfolio flow s in the first half year, follow ing
speculation that there w ould be a revaluation of the
C hinese yuan resulting in an appreciation of regional
currencies including the ringgit. These inflow s w ere at
m anageable levels and Bank N egara M alaysia sterilised
the additional liquidity. O n 21 July, Bank N egara
M alaysia announced the change from a fixed exchange
rate system to a m anaged float exchange rate regim e.
The ringgits value is now based on a basket of
currencies of m ajor trade partners and regional
countries. The new arrangem ent w ould enhance
econom ic flexibility w ithout sacrificing the stability
accorded by the previous arrangem ent. Follow ing the
floating of the ringgit, speculative portfolio positions
that had been built-up in the first half of the year w ere
unw ound. The unw inding of these flow s w as orderly,
indicating that the price discovery process in the
financial m arkets has been able to function efficiently.
The strong reserves level provided an added cushion for
these outflow s, som e of w hich w ere large, w hile the
dom estic financial system continued to operate in an
environm ent of am ple liquidity.
O f significance, the change to the floating rate regim e
w as preceded w ith the setting up of the necessary risk
m anagem ent infrastructure to ensure a sm ooth
transition. Rules on hedging w ere liberalised in A pril
2004 to allow both residents and non-residents to enter
into hedging arrangem ents w ith licensed onshore
banks. The rules allow greater flexibility to residents in
m anaging their investm ents by facilitating w ider options
and avenues for risk m anagem ent. In addition, Bank
N egara M alaysia took steps to further liberalise the
foreign exchange adm inistration rules in order to
im prove the delivery system and enhance flexibility in
the financial system and the econom y. Effective 1 A pril
2005, further changes w ere m ade to give greater
flexibility for overseas investm ent, including changing
the thresholds for investm ent abroad, extension of
credit facilities to non-residents and placem ent of funds
by residents. Residents are also now allow ed to open
foreign currency accounts onshore or offshore, w ithout
requiring the approval from the C entral Bank. Sim ilarly,
lim its on foreign currency credit facilities that can be
obtained by residents have been increased.
In m anaging the financial sector, the year saw further
progress in im plem enting the longer-term developm ent
plans for the sector. W ith the Financial Sector M asterplan
(FSM P) entering the second of its three phases, the stages
w as set in 2005 to create investm ent banks. Investm ent
banks w ould m ainly be involved in capital m arket
activities and w ould be form ed by the rationalisation of
m erchant banks, stock-broking com panies, and discount
houses. Sim ilarly, universal brokers w ould also be allow ed
to seek partners to form investm ent banks. This
integration w ill enhance the efficiency and effectiveness
of capital m arket players by m inim ising duplication of
resources and overlapping of activities, leveraging on the
com m on infrastructure and reaping benefits of synergies
and econom ies of scale. The fram ew ork is am ong the key
initiatives to strengthen the capacity and capabilities of
dom estic banking and financial groups to contribute
tow ards econom ic transform ation and developing a m ore
resilient, com petitive and dynam ic financial system .
A nother sign of the grow ing m aturity of the financial
system w as the announcem ent that the lim its to foreign
ow nership in local investm ent banks w as now raised to
49% , com pared w ith 30% for dom estic banking groups.
To further increase com petition in the banking
industry, operational flexibility has been aw arded to
the locally incorporated foreign banking institutions
(LIFBs) operating in M alaysia. LIFBs are allow ed to
establish four additional branches in 2006, w hich
represents the first of a phased approach of
branching liberalisation. This w ill allow greater
participation of LIFBs in financial interm ediation to all
segm ent of the M alaysian society and econom y. The
w ider dispersion of LIFBs branches across the country
w ill further enhance consum ersaccess to a w ider
range of banking services and increase com petition in
providing w ider spread of products to less developed
areas of the country. The policy of gradually
deregulating and liberalising the banking system is
com plem entary w ith the objectives of bringing
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 15
16
increased benefits by low ering the cost of
interm ediation and increasing the quality of financial
services provided.
In the capital m arket, the launch of RM 760 m illion
W aw asan Bond by the International Bank of Reconstruction
and Developm ent (IBRD) in April 2005 w as a significant
developm ent. This issuance further w idened and deepened
the dom estic bond m arket. The G overnm ent has also issued
short-term Islam ic Treasury Bills and longer-term Islam ic
bonds to m eet investor dem and and diversify further Islam ic
financial instrum ents. Ensuring tax neutrality betw een
Islam ic and conventional capital m arket products w ould
further facilitate the developm ent of the Islam ic bond
m arket. To further enhance m arket turnover, Bank Negara
M alaysia has actively used repurchase agreem ents (repo)
since January as a m onetary instrum ent, introduced the
Institutional Custodian Program m e to enable borrow ing and
lending of securities, and provided a securities lending
facility for principal dealers. The im plem entation of these
m easures are also aim ed at im proving the price discovery
process and increasing liquidity in the financial m arket and
the developm ent of a reflective benchm ark yield curve. The
ringgit bond m arket has continued to becom e an
increasingly im portant source of financing to the econom y.
In 2005, Bank N egara M alaysia adopted a m ulti-pronged
approach in em pow ering consum ers. In strengthening
the consum er protection and education infrastructure
various initiatives w ere im plem ented, and these include
the establishm ent of Bank N egara M alaysia LIN K (Laman
Informasi Nasihat dan Khidmat), the introduction of Basic
Banking Services Fram ew ork, the establishm ent of the
Financial M ediation Bureau, the introduction of a D eposit
Insurance System and the establishm ent of the C redit
C ounselling and D ebt M anagem ent (C C D M ) A gency. In
particular, the Bank N egara M alaysia LIN K aim s to
enhance the effectiveness of Bank N egara M alaysias
interface w ith the public and is established as a
centralised point of contact w ith the public on issues that
relates to Bank N egara M alaysias policies and operations,
the financial sector and consum er education in the area
of finance. Bank N egara M alaysia LIN K also assists SM Es
on issues that relate to access to financing by providing a
centralised point of contact, and thereby contributing
tow ards enhancing their contribution to the econom y.
These initiatives involve both infrastructure and
institutional capacity developm ent that includes financial
education, advisory services, distress m anagem ent,
rehabilitation and putting in place avenues for redress.
These steps are part of the efforts to ensure stability of
the financial system as prom oting a sound and
progressive financial system is a pre-requisite to achieving
sustainable econom ic grow th and developm ent.
SECTORAL REVIEW
Manufacturing Sector
Value added in the m anufacturing sector grew at a
m oderate pace of 4.9% in 2005 (2004: 9.8% ), as the
dom estic electronics and electrical product (E& E)
segm ent experienced a soft patch in the first half of the
year follow ing the m ild dow nturn in the global
sem iconductor industry. H ow ever, the slow dow n w as
brief and by the second half of the year, the recovery in
the E& E segm ent led to a stronger perform ance of the
m anufacturing sector (2H : 6.4% ; 1H : 3.8% ). The
im pact w as also cushioned by continued grow th in
selected resource-based industries, such as the chem ical
products and off-estate processing industries. In the
dom estic-oriented industries, food and beverages and
paper products industries also strengthened further
during the year, w hile the transport equipm ent industry
w as firm supported by the strong dom estic
consum ption. H ow ever, industries that are related to the
construction sector, nam ely basic m etal, non-m etallic
m ineral products and fabricated m etal products
rem ained w eak affected by the subdued perform ance of
the construction sector.
The manufacturing sector
continued to contribute to
growth despite the slowdown
in the electronics and electrical
(E&E) product segment. The
E&E recovery in the second
half-year improved the
performance in the
manufacturing sector.
In 2005, the share of the m anufacturing sector to
overall G D P w as largely unchanged at 31.4% (2004:
31.6% ). G iven the continued additions in capacity
am idst the new investm ents, the overall capacity
utilisation rate of the m anufacturing sector w as low er at
75% in 2005 (2004: 79% ). The export-oriented
industries operated at 77% , w hile the dom estic-
oriented industries operated at 73% during the year
(2004: 81% and 75% respectively).
Based on the latest statistics from the revised
Industrial Production Index (2000=100),
m anufacturing production grew by 5.1% in 2005
(2004: 12.8% ). O f significance, output grow th of the
electronics and electrical products (E&E) industry
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 16
17
The Malaysian Economy in 2005
slow ed dow n to 3.5% in 2005 (2004: 19.3% )
affected by the global sem iconductor dow n-cycle in
the first half of the year. In an environm ent of an
oversupply situation, w hile w orld dem and continued
to rem ain relatively steady, an early inventory
adjustm ent by industry players across the various
segm ents helped in the speedier recovery process
during the second half of the year. O f significance,
producers in the com puter segm ent had norm alised
their inventory levels by the end of first quarter of
2005. Furtherm ore, global dem and for com puters
w as also supported by a structural shift in consum er
dem and from desktop com puters to m obile and
portable com puters, such as laptops, pocket personal
com puters (PC s) and handheld PC s w ith w ireless
connectivity function. Being a m ajor exporter of
com puters w ith renow ned m ultinational com panies
operating in M alaysia, the country had benefited
from the positive developm ents in the com puter
segm ent throughout 2005. C om puters and parts
accounted for 27.5% of total m anufactured exports
and 41.8% of the E& E exports.
D espite the slow dow n, dom estic E& E m anufacturers
continued to invest and upgrade to higher value-added
products. O f significance, m ajor European electronics
m anufacturers continued to shift som e of their
production lines of m ore advanced sem iconductors to
M alaysia to benefit from the cost-efficient and m atured
m anufacturing base. The m ove had broadened and
deepened the industrial linkages w ithin the sector.
By the second half of 2005, the global sem iconductor
industry began to show signs of recovery. G lobal
sem iconductor sales com piled by the Sem iconductor
Industry A ssociation (SIA ) gradually picked up to
record a grow th of 8.6% by D ecem ber 2005 after
bottom ing out in July 2005. The U S book-to-bill ratio
of sem iconductor equipm ent also rebounded to 0.93
by-end 2005 from its low of 0.77 recorded in
February and the U S new and unfilled orders
continued to register positive grow th. Industry experts
expect the recovery to becom e m ore entrenched in
2006 and to continue into 2007. G row th w ould be
increasingly broad based, supported by expansion in
all categories of sem iconductors, particularly
consum er electronics w hich is expected to be the next
driver of grow th in the E& E industry.
Table 1.3
Manufacturing Sector: Value Added and
Production
2004 2005
A nnual change in (% )
Value-added
(Constant at 1987 prices) 9.8 4.9
Overall Production 12.8 5.1
Export-oriented industries 14.8 5.7
of which:
Electronics 25.6 5.2
Electrical products 5.5 -0.8
C hem icals and chem ical products 15.1 11.0
Petroleum products 9.8 10.8
Textiles, w earing apparel and footw ear -4.8 3.4
W ood and w ood products 12.8 1.5
Rubber products 8.1 -0.4
O ff-estate processing 2.7 8.1
Domestic-oriented industries 5.2 2.8
of which:
C onstruction-related products 1.3 -0.5
Food products 2.0 7.6
Transport equipm ent 11.7 8.5
Fabricated m etal products 11.4 -4.9
Source: D epartm ent of Statistics, M alaysia
Graph 1.5
Manufacturing Sector: Sales, Production and
Exports
* 2005's production data w ere based on the new IPI figures (2000=100).
0
5
10
15
20
25
30
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2004 2005*
Sales Production Exports
A nnual change (% )
Graph 1.6
Capacity Utilisation in the Manufacturing Sector
60
65
70
75
80
85
1999 2000 2001 2002 2003 2004 2005p
%
-20
-10
0
10
20
30
C apacity utilisation (LH S) O utput (RH S)
A nnual change (% )
p Prelim inary
O utput data from 2001 onw ards is based on the new Industrial Production
index (2000=100)
Source: D epartm ent of Statistics, M alaysia
Bank N egara M alaysia
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 17
18
The chemicals and chemical products industry
continued to register a double-digit grow th in 2005
(11% ; 2004: 15.1% ), led m ainly by the strong
grow th in production of plastic products (21.5% ;
2004: 19% ) and other chem ical products (10% ;
2004: 25.5% ). H igher dom estic and external
dem and, em anating from the packaging, household
and autom otive segm ents supported the stronger
expansion in the output of plastic products.
M eanw hile, production of other basic industrial
chem icals expanded further in 2005 due m ainly to
higher production of oleochem icals, w hich is a
derivative of crude palm oil.
The off-estate processing industry recorded a robust
grow th in 2005, expanding by 8.1% (2004: 2.7% )
benefiting from the higher output of crude palm oil during
the year. Production of palm oil expanded at a faster rate
of 7% (2004: 4.7% ) attributable to increases in m ature
areas as w ell as higher yields.
G row th in output of rubber products declined
m arginally by 0.4% in 2005 (2004: 8.1% ), due m ainly to
a decline in production of tyres and tubes, w hile the
rubber gloves industry continued to expand. The
production of tyres and tubes during the year w as
affected by a num ber of factors, including shortage of
raw m aterials in line w ith the low er rubber production,
tem porary disruption in production of a m ajor tyre
m anufacturer due to upgrading of m achineries as w ell as
com petition from other regional producers.
O utput grow th of wood and wood products m eanw hile
m oderated in 2005 (1.5% ; 2004: 12.8% ) due partly to
w eaker dem and for M alaysian products from the m ajor
industrial countries such as the US, United Kingdom (UK)
and Japan. During the year, the industry also faced
shortages in supply of raw m aterials, particularly rubber
w ood. Subsequently, the G overnm ent took m easures to
alleviate the supply shortage by banning the export of
rubber w ood saw n tim ber as of 8 June 2005.
O utput grow th of the textile, wearing apparels and
footwear industry recovered to expand by 3.4% in
2005 (2004: -4.8% ) as M alaysia w as one of the
countries that benefited from the diversion of dem and
from C hina follow ing the exhaustion of U S im port
quota on C hinas textile products. Initially, in the early
part of the year, production w as soft as the expiry of the
A greem ent on Textile and C lothing (ATC ), w hich cam e
into effect on 1 January 2005, had an adverse effect on
dem and as industrial countries shifted their orders for
textile and w earing apparels to low er-cost countries,
particularly C hina. H ow ever, follow ing the influx of
textile im port from C hina, the U S authorities responded
by im posing a grow th lim it on im ports of C hinese textile
goods to the U S. A s C hinas im port quota for the year
w as filled up by July 2005, the excess new orders of
textile products from the U S w ere diverted to other
textile-exporting countries in the region, including
M alaysia, hence benefiting the textile output of these
countries particularly tow ards the end of the year.
Production of petroleum products w as also favourable
during the year due m ainly to robust oil refining
activities am idst the higher dom estic dem and. G row th
w as also supported by activities related to liquefaction
of natural gas for the export m arket.
In the domestic-oriented industries, production of
transport equipment continued to expand strongly in
2005 due to the rapid grow th in the car assem bly
activities and the spillover effects on production of parts
and accessories for m otor vehicles. A ssem bly of m otor
vehicles expanded by 7.5% (2004: 12.6% ), led by the
sustained dem and for passenger cars w hich w as
supported by increases in household incom es and
attractive financing packages offered by financial
institutions, together w ith the introduction of new and
affordable car m odels during the year. M eanw hile, the
increasing localisation of the new m odels introduced
during the year had also benefited the local production
of car parts and accessories (12.1% ; 2004: 1.1% ).
O n the other hand, output of industries in the
construction-related products rem ained subdued
(-0.5% ; 2004: 1.3% ), in line w ith the perform ance of
the construction sector. In particular, production of iron
and steel w as affected by the slow dow n in the
dom estic civil engineering segm ent, w hich is the m ajor
user of iron and steel. O n the export front, external
Graph 1.7
Production and Exports of the Electronics
Industry
A nnual change %
2005
Production of electronics in M alaysia
Electronics exports of M alaysia
W orldw ide sales of sem iconductors
-10
0
10
20
Jan M ar M ei N ov Jul Sep
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 18
19
The Malaysian Economy in 2005
dem and for iron and steel also softened substantially in
2005, due to the excess production in C hina, thus
resulting in an overcapacity situation in the global
m arket. M eanw hile, output grow th in the non-metallic
mineral products recovered during the year aided by
the turnaround in the output of glass products.
H ow ever, production of cem ent, structural clay and
ceram ic products continued to decline in line w ith the
subdued perform ance of the construction sector.
Production of fabricated metal contracted for the first
tim e since 2001, declining by 4.9% (2004: 11.4% ) in
2005. The w eak perform ance of this industry w as
caused m ainly by the contraction in product segm ents
such as w ire products, m etal fasteners, pew ter and
alum inium products. M eanw hile, the perform ance of
other segm ents rem ained positive, particularly for
structural m etal products such as tanks, boilers, pressure
vessels and heaters w hich are used m ainly in the
petroleum , food and off-estate processing industries.
O utput grow th in the paper products industry
strengthened to 7.5% in 2005 (2004: 4.2% ), supported
by dem and for pulp and paper products and continued
grow th of containers and paperboards, led by the
increase in packaging activities em anating from the
food and beverages industry.
O utput of the food and beverages industries w as
higher in 2005, underpinned by strong private
consum ption. O f significance, the higher grow th in the
food industry w as led m ainly by the im provem ents in
the segm ents related to dairy products as w ell as
chocolate and sugar confectionary. The tobacco
industry contracted by 3% (2004: 2.9% ) due to low er
dem and for cigarettes arising from the higher prices
follow ing the increase in sales tax on cigarettes.
Services Sector
In 2005, the services sector continued to be the
m ajor driver of grow th, contributing to 3.8
percentage points of the 5.3% G D P grow th. Value-
added grow th of the services sector rem ained high at
6.5% (2004: 6.8% ), surpassing the overall G D P
grow th during the year. A s a result, the share of the
sector to overall G D P increased further to 58.1%
(2004: 57.4% ; 1995: 51.2% ).
A n im portant contributing factor for the continued
lead perform ance of the services sector in 2005 w as
the strong grow th in private consum ption.
C orrelation betw een final services and private
consum ption is significant (1Q 2000 4Q 2005:
0.66). Besides the robust private consum ption, the
services sector w as also driven by higher tourism and
business activities and, to a lesser extent by trade-
related activities, w hich picked up tow ards the latter
part of the year in line w ith the upw ard m om entum
in m anufacturing production and exports.
The services sector remained
the key driver of growth
underpinned by strong growth
in private consumption.
In addition, efforts by the G overnm ent in recent years
in prom oting new areas of grow th in the services
sector also began to yield results and contribute
tow ards the services sectors grow th. These are high
value-added activities such as inform ation technology
(IT) services; shared services and outsourcing (SSO );
Islam ic finance; investm ent banking; and health and
m edical tourism .
G iven the strong private consum ption, the final
services segm ent (com prising the utilities; w holesale
and retail trade, hotels and restaurants; G overnm ent
services and other services sub-sectors) registered a
higher grow th of 7.1% (2004: 6.6% ), the highest
recorded since 1995. M eanw hile, the intermediate
services segm ent (com prising the transport, storage
and com m unication; and finance, insurance, real
estate and business services sub-sectors) grew at a
m oderate pace of 5.7% (2004: 7.1% ). The im pact of
the m oderation in m anufacturing grow th and
regional trade w as to som e extent offset by stronger
perform ance of other business activity.
p Prelim inary
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
1995 1997 1999 2001 2003 2005p
A nnual change (% )
Sevices
Graph 1.8
Growth in Private Consumption, Final Services and
the Overall Services Sector
Final services Private consum ption
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 19
20
The wholesale and retail trade, hotels and
restaurants sub-sector, w hich accounts for one-fourth of
the services sector recorded another year of strong grow th
of 8% (2004: 7.1% ). The strong perform ance w as
supported by higher spending by dom estic households and
foreign tourists. In particular, the distributive trade
(w holesale and retail) industry strengthened significantly.
The m otor vehicles trading and related accessories stores,
one of the m ajor com ponents of the distributive trade
industry recorded a robust perform ance supported by the
13% grow th in vehicle sales.
Increase in dom estic tourism activity follow ing the full
adoption of the five-day w orking w eek for the civil
service since July 2005 w as another contributory factor
for the robust perform ance of the w holesale and retail
trade, hotels and restaurants sub-sector. In addition, the
various prom otions and strategies undertaken by the
M inistry of Tourism and the private sector, the change in
the M ega Sales C arnival from tw ice previously to once
a year (23 July 2005 to 4 Septem ber 2005) and the
Year-end Sales (new program m e: 1 D ecem ber 2005 to
31 January 2006) resulted in increased shopping activities
during the year. The strong consum er sentim ent and
confidence in the econom y also contributed to the higher
consum er spending during the year.
Besides higher dom estic tourism , the country also saw an
increase in foreign tourist arrivals, w hich contributed to
the grow th of the w holesale and retail trade, hotels and
restaurants sub-sector in term s of increase in revenue
from shopping, dining and hotel accom m odation. The
increased num ber of high-spending and long-haul
tourists from the O ceanic (Jan-N ov 2005: 28.9% ),
Southern A sian (27% ), W est A sian (15.6% ) and
European (13% ) countries contributed to the grow th in
the sector. A s a result, the average hotel occupancy rate
rose to 63.6% in 2005 (2004: 60.8% ).
In addition, there w as also an increase in long-term
tourists as reflected by the 36.4% grow th in the
num ber of M alaysia, M y Second H om e(M M SH )
program m e participants (2004: 16.5% ). The higher
num ber of new participants w as a result of the
increased efforts taken by the G overnm ent in
prom oting the program m e. A m ong the key m easures
taken by the G overnm ent to m ake the program m e
m ore attractive to foreigners include extending the
social visa from five years to ten years. U nder the
current M M SH program m e (2002 2005), close to
7,000 foreign participants have been able to travel and
live in M alaysia for an extended period, as w ell as to
bring their fam ilies, purchase residential property and
send their children to M alaysian schools.
G row th in the finance, insurance, real estate and
business services sub-sector w as sustained at 5.4%
in 2005 (2004: 6.3% ). G row th em anated from
expansion in bank lending activities as w ell as increased
collection of insurance prem ium s. D espite the narrow ing
spreads betw een the lending and deposit rates am idst
the com petition as w ell as m ergers betw een com m ercial
banks and finance com panies, the increase in total loans
outstanding by 8.6% contributed to the higher net
interest incom e during the year. The finance segm ent
has also been increasingly supported by fee-based
incom e arising from the introduction of new banking
services and products. Islam ic banking gained further
Table 1.4
Growth in the Services Sector at Constant 1987 Prices
2004 2005p 2004 2005p
A nnual change (% ) % share of G D P
Services 6.8 6.5 57.4 58.1
Interm ediate services 7.1 5.7 23.8 23.9
Transport, storage and com m unication 8.5 6.3 8.8 8.8
Finance, insurance, real estate and business services 6.3 5.4 15.1 15.1
Final services 6.6 7.1 33.5 34.1
Electricity, gas and w ater 8.2 5.5 4.1 4.1
W holesale and retail trade, hotels and restaurants 7.1 8.0 14.3 14.7
G overnm ent services
1
6.5 8.8 7.3 7.6
O ther services
2
4.9 4.9 7.8 7.8
1
Include general public services (general public adm inistration, external affairs and public order and safety), defence, health, education and others.
2
Include im puted rent from ow ner-occupied dw ellings; com m unity, social and personal services; products of private non-profit services to households and dom estic
services of households.
p Prelim inary
Source: D epartm ent of Statistics, M alaysia
C01 Malaysian Economy pg02-27 4/14/06, 13:58 20
21
The Malaysian Economy in 2005
prom inence during the year w ith the establishm ent of
three new Islam ic banking subsidiaries and one foreign
Islam ic bank. A s a result, grow th in total loans (16.5% ),
deposits (15.1% ) as w ell as assets (17.7% ) of the
Islam ic banking system continued to rem ain firm .
Insurance activity w as also strong am idst the increase
in the penetration rate in the life insurance industry
(38.7% ; 2004: 37.9% ), led m ainly by strong grow th
in prem ium s collected from new businesses from
endow nm ent; and m edical and health insurance, and
stronger grow th in general insurance, particularly the
m otor vehicles industry. The increase in net prem ium s
w as also contributed by the higher net contribution
from the takaful industry, em anating from both the
fam ily and general takaful funds.
The perform ance of the business services segm ent
that includes the SSO industry and IT services w as
also encouraging. D uring the year, an additional 19
operational headquarters, 15 international
procurem ent centres and three regional distribution
centres w ere approved. In addition, 37 new SSO
com panies w ere granted M ultim edia Super C orridor
(M SC ) status during the year, thus bringing the total
to 57 as at end-2005. These entities undertake
various types of shared services activities w ith their
related and unrelated com panies w ithin and
outside M alaysia.
W ith regards to IT services, the G overnm ent
continued to prom ote M SC as a global IC T hub and
to increase the usage and adoption of innovative
dom estic IC T products and services. A s part of the
gradual rollout of the M SC to the rest of the country,
Penang and Kulim H i-tech Park in Kedah w ere
declared cybercity status in 2005, thus enabling new
M SC -status com panies to be based in the northern
region. In the second phase of the rollout (2004 -
2010), the focus is on accelerating the M SC flagship
applications, increasing adoption and introducing
new initiatives to increase its com petitiveness. A s at
end-2005, a total of 1,421 com panies have been
given M SC -status w ith total approved investm ent of
RM 18.2 billion.
The transport, storage, and communication sub-
sector continued to expand by 6.3% in 2005 (2004:
8.5% ). In the telecom m unications industry, grow th
w as m ainly contributed by the cellular segm ent w here
the num ber of cellular subscribers and usage of both
voice and data services continued to increase strongly
during the year. C ellular subscribers rose by 33.8%
(2004: 31.3% ) to 19.5 m illion (74.1% penetration
rate), w hile short m essaging system (SM S) traffic rose
significantly by 130.8% . D uring the year, SM S w as
increasingly used as a m eans of com m unication and
to substitute for telephone voice calls; and in various
applications, especially in the entertainm ent and
leisure industry. D em and in the telecom m unications
industry w as also induced by the introduction of 3G
cellular phones services during the year. M eanw hile,
the num ber of Internet subscribers rose to 3.7 m illion
at end-2005, representing a grow th of 11.5% (2004:
14.3% ). A s at end-2005, the penetration rate for
Internet stood at 13.9% (2004: 12.7% ). In the case
of broadband, its usage continued to increase w ith
the penetration rate rising to 1.9% as at end-2005
(end-2004: 1% ).
N evertheless, grow th in the telecom m unications
industry w as m ore m oderate com pared to 2004,
follow ing the dow nw ard trend in average revenue per
user (A RPU ) of cellular phones during the year. This
w as due to the keen com petition am ong
telecom m unication players, as w ell as low er spending
by new cellular subscribers, consisting m ainly
students and other low er incom e groups attracted by
the introduction of low -priced starter packs.
Table 1.5
Selected Indicators for the Services Sector
2004 2005p
A nnual change (% )
Electricity production index 8.2 5.8
Loans outstanding in the banking system 8.5 8.6
Insurance prem ium s 16.3 7.7
Bursa M alaysia (turnover, volum e) -4.2 -4.7
Bulk cargo throughput at five m ajor ports
1
9.2 3.4
C ontainer throughput at six m ajor ports
2
10.7 4.6
A irport passenger traffic 18.9 4.8
A ir cargo handled 10.5 4.3
C onsum ption credit outstanding 16.4 18.7
Im ports of consum ption goods 24.1 5.9
Tourist arrivals 48.5 4.3
3
SM S traffic 54.7 130.8
%
H otel occupancy rate 60.8 63.6
Penetration rate:
- Internet dial-up 12.7 13.9
- Broadband 1.0 1.9
- M obile phone 56.5 74.1
- Fixed line 17.2 16.6
1
Port Klang, Johor Port, Penang Port, Sabah Ports and Bintulu Port
2
Port Klang, Johor Port, Port of Tanjung Pelepas, Penang Port, Sabah Ports and
Bintulu Port
3
Refers to Jan-N ov data
p Prelim inary
Source: D epartm ent of Statistics, M alaysia; M alaysia A irports H oldings Berhad; Bursa
M alaysia Berhad; M alaysian C om m unications and M ultim edia C om m ission; M inistry
of Finance; Relevant port authorities; M alaysia Tourism Prom otion Board and Bank
N egara M alaysia.
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 21
22
M eanw hile, the transportation segm ent grew
m oderately in line w ith the slow er expansion in
trade-related activities and m oderate grow th in
passenger travel. Total container throughput at the
five m ajor ports increased by 4.6% in 2005 (2004:
10.7% ), w hile the air cargo volum e increased by
4.3% (2004: 10.5% ). A fter a significant increase in
tourist arrivals in 2004 in the post-SA Rs recovery
period, air passengers at all airports grew
m oderately by 4.8% in 2005 (2004: 18.9% ). Total
passenger traffic at the Kuala Lum pur International
A irport recorded a grow th of 10.2% (2004: 20.6% )
to reach 23.2 m illion passengers in 2005, supported
by new landings and increase in flight frequencies of
several international airlines as w ell as grow th in the
budget airlines. Passengers carried by the dom estic
budget airline rose by 30.1% or 1.1 m illion to a
total 4.8 m illion in 2005. The significant increase
w as in response to new routes introduced by the
budget carrier during the year. The year also saw a
higher grow th in land and rail passenger traffic as
reflected by an increase in toll revenue from m ajor
highw ays as w ell as higher light rail transit
riderships.
In the Government services sub-sector, the
introduction of new allow ances and increase in
existing allow ances for selected civil servants, yearly
increm ents as w ell as bonus paym ents led to higher
em olum ents, w ith the sub-sector recording a higher
grow th of 8.8% (2004: 6.5% ).
G row th in the other services sub-sector w as sustained
at 4.9% supported by expansion in other private
services, nam ely entertainm ent and new areas such as
private m edical and healthcare services, private higher
education services and m ultim edia broadcasting
services. M alaysia is increasingly becom ing a choice
centre for m edical tourism , particularly in niche areas
such as cardiology, radiology, general surgery and
w ellness program m e. Revenue from the private
healthcare services, including private hospitals, recorded
a strong grow th as a result of m ore M alaysians and
foreigners seeking m edical treatm ent and health
screenings in private hospitals and clinics. A s at end-
2005, 35 private hospitals are recognised by the
M inistry of H ealth for the prom otion of health tourism .
In the private higher education services industry, there
are m ore than 550 private higher educational
institutions in 2005, including 11 private universities, 12
university colleges, five foreign university branch
cam puses and 537 private colleges, serving around
312,000 local students and 27,000 foreign students.
The m ajority of the foreign students w ere from PR
C hina and Indonesia, w hich accounted for a com bined
share of about 53.5% of total foreign students.
M eanw hile, the utilities sub-sector expanded by 5.5%
(2004: 8.2% ), supported by continued strong expansion
in the econom y, w hich resulted in sustained dem and for
electricity, particularly from the com m ercial and
household sectors.
Agriculture Sector
G row th in the agriculture, forestry and fishing
(agriculture) sector expanded at a m ore m oderate
pace of 2.1% in 2005 (2004: 5% ). The grow th w as
m ainly supported by strong perform ance in the palm
oil sector and higher grow th in livestock, particularly
poultry. M eanw hile, output of other agriculture
activities including rubber, fisheries, saw logs, cocoa
and paddy, declined during the year affected by
factors related to nature. D uring the year, the
G overnm ent together w ith the private sector
continued in efforts to revitalise the agriculture
sector and to sustain its im portance as the third
largest econom ic sector in the country. This w as
reflected in term s of the share of the sector to
overall G D P (8.2% ) as w ell as em ploym ent, w ith
12.9% of the overall labour force or 1.41 m illion
people involved in the activity. O n the external front,
The agriculture sector
continued to expand, led
mainly by strong performance
in the palm oil sector amidst the
favourable commodity prices.
foreign exchange earnings from agriculture exports
grew by 3.4% to account for 7% of total gross
exports during the year.
W hile the palm oil sector benefited from high yields
and an increase in m ature areas, perform ance of the
other agriculture crops w ere affected during the year
by unfavourable w eather conditions. In the initial
part of the year, the after-effects of the Tsunam i as
w ell as the dry w eather spell affected fishing and
rubber activities. This w as subsequently follow ed by
rainy conditions tow ards the end of the year w hich
disrupted rubber tapping and harvesting activities of
m any crops. N evertheless, plantation com panies and
farm ers continued to be encouraged by the
favourable com m odity prices in the global m arket.
A t the sam e tim e, yields continued to rise as a result
of G ood A griculture Practices, w hich placed
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 22
23
The Malaysian Economy in 2005
em phasis on intensive application of agricultural
inputs such as fertilizers and utilisation of labour-
saving technologies am ong estates and sm allholders.
D uring the year, the G overnm ent continued to
intensify its efforts to deepen and broaden the
agriculture base as w ell as to encourage
dow nstream activities to strengthen the linkages to
the other sectors of the econom y. G overnm ent
m inistries and agencies have begun im plem enting
plans to transform and m odernise the agriculture
sector through higher productivity, accelerated
private sector involvem ent (including governm ent-
linked com panies) and deeper linkages betw een
upstream activities and dow nstream agro-based
industries.
O f significance, the food crops sub-sector, w hich
accounts for about 40% of the value added in the
agriculture sector, has vast potential for creation of
dow nstream value-adding activities such as
processed and m anufactured products for both
dom estic consum ption and exports. These new
activities w ould not only accentuate the grow th
potential of the econom y and increase export
earnings, but w ould also ensure that the rural
com m unities involved in the agriculture sector enjoy
higher and m ore stable incom e.
Crude palm oil (CPO), w hich is the m ost im portant
crop in term s of value added in the agriculture sector
(37% ), saw another year of strong expansion, grow ing
by 7% to reach a record high of 14.96 m illion tonnes
Table 1.6
Agriculture Sector: Value Added, Production and Exports
2004 2005p
Volum e and Value A nnual change (% ) Volum e and Value A nnual change (% )
Value Added (RM million at 1987 prices) 21,137 5.0 21,585 2.1
Production
1
of which:
C rude palm oil 13,976 4.7 14,961 7.0
Rubber 1,169 18.6 1,124 -3.8
Saw logs 21,509 -0.1 21,334 -0.8
C ocoa beans 33 -7.8 28 -16.3
Fish landings 1,528 3.2 1,424 -6.8
Exports (RM million) 36,176 7.4 37,421 3.4
of which:
Palm oil
(000 tonnes) 11,788 -5.6 13,073 10.9
(RM /tonne) 1,706 5.5 1,456 -14.6
(RM m illion) 20,107 -0.4 19,036 -5.3
Rubber
(000 tonnes) 1,105 16.7 1,128 2.1
(sen/kilogram m e) 470 24.3 513 9.0
(RM m illion) 5,198 45.1 5,787 11.3
Saw logs
(000 cubic m etres) 5,207 -5.9 5,759 10.6
(RM /cubic m etre) 398 8.9 428 7.7
(RM m illion) 2,070 2.5 2,465 19.1
Saw n tim ber
(000 cubic m etres) 3,166 13.5 3,685 16.4
(RM /cubic m etre) 1,015 -10.4 1,099 8.3
(RM m illion) 3,214 1.7 4,051 26.0
1
A ll in 000 tonnes, except for saw logs in 000 cubic m etres.
p Prelim inary
Source: D epartm ent of Statistics, M alaysia
M alaysian Palm O il Board
Forestry D epartm ents (Peninsular M alaysia, Sabah and Saraw ak)
M alaysian C ocoa Board
Fisheries D epartm ent, M alaysia
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 23
24
in 2005. This represented the third consecutive year of
strong grow th (2004: 13.98 m illion tonnes, +4.7% ;
2003: 13.36 m illion tonnes, +12.1% ). The increase in
production w as m ainly in the first half-year (20.3% )
due to a bum per harvest. The substantial increase w as
attributed to tw o m ain factors.
First, during the year, the m ature oil palm acreage rose
substantially by 5.2% (179,790 hectares) to 3.63 m illion
hectares (2004: +4.5% ). The increase w as reflected
across all regions, w ith m ature acreage in Peninsular
M alaysia rising by 5.3% to 2.07 m illion hectares,
Sabahs acreage increasing by 3.9% to 1.12 m illion
hectares, w hile Saraw aks w as higher by 8.3% to 0.44
m illion hectares. O f significance, production in Sabah
(the largest producer by state accounting for 5.33
m illion tonnes or 35.6% of total production) and
Saraw ak recorded double-digit increases of 11.9% and
19.7% , respectively, w hile production in Peninsular
M alaysia rose by 2.4% . O verall, Peninsular M alaysia
continued to account for a m ajority share of about 55%
to total M alaysian C PO production (2004: 58% ).
The second factor contributing to the strong
production w as the continued uptrend in palm oil yield
productivity as reflected by the increase in oil
extraction rates (O ER) and output of fresh fruit
bunches (FFB). The M alaysian O ER continued to rem ain
above the critical 20% threshold for the second
straight year, rising to 20.15% (2004: 20.03% ). This is
a key perform ance indicator in the industry as every
1% increm ent in O ER translates to an estim ated
increase of about 500,000 tonnes in C PO output. FFB
yields w ere also higher by 1.5% to 18.88 tonnes per
m ature hectare (2004: 18.60 tonnes per m ature hectare).
In the light of these positive developm ents, M alaysia
continued to m aintain its status as the w orlds largest
palm oil producer and exporter, accounting for 45% of
w orld output and 51% of w orld exports.
Prices of palm oil rem ained supportive of the industry in
2005 w ith the C PO local delivery price averaging
RM 1,398 per tonne. N evertheless, com pared w ith the
previous year, the price w as low er by 16% (2004:
RM 1,664 per tonne). Palm oil prices began to
consolidate since the second half of 2004 due to the
increase in the supply of global edible oils as w ell as the
increase in dom estic palm oil stocks. The trend continued
into 2005 w ith the price declining in the first half-year by
24.7% to RM 1,391 per tonne before stabilising at
RM 1,405 per tonne in the second half-year. The sharp
increase in palm oil harvests (1H 2005: +20.3% ; 1H
2004: -2.3% ) and the attendant increase in dom estic
palm oil stocks (M ay: 1.48 m illion tonnes) led to softer
prices. N evertheless, prices rem ained relatively stable in
the second half-year supported by other m itigating
factors such as the sluggish soybean harvest in the Latin
A m erican region as w ell as expectations of future
dem and for palm oil-based biodiesel. O verall, C PO
rem ained com petitive against other m ajor edible oils, as
the price discount of C PO to that of soybean oil and
rapeseed oil w idened further during the year to U SD 123
per tonne and U SD 237 per tonne, respectively.
The Peoples Republic of C hina (PR C hina) rem ained as
the largest im porter of M alaysian palm oil in 2005,
accounting for 22.1% of the total exports. H ow ever,
export grow th to PR C hina grew at a m ore m oderate
pace (2005: 2% ; 2004: 13.1% ) despite the fact that PR
C hinas im port quota for palm oil w as raised from 2.7
m illion tonnes in 2004 to 3.2 m illion tonnes in 2005. The
2001 2002 2003 2004 2005p
0
2
4
6
8
10
12
14
16
Graph 1.9
Oil Palm: Area, Production and Yield
Production in m illion tonnes (RH S)
H ectare Tonne
M ature area in '000 hectares (LH S)
Yield of C PO in tonnes per m ature hectare (RH S)
p Prelim inary
Source: M alaysian Palm O il Board (M PO B)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
400
800
1,200
1,600
0
500
1,000
1,500
2,000
0
Price
(RM /tonne)
1Q 1Q 1Q 1Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q
Source: M alaysian Palm O il Board (M PO B)
2002 2003 2004 2005
Graph 1.10
Palm Oil Price and Stocks
Stocks
('000 tonne)
C PO local delivery price
Stocks
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 24
25
The Malaysian Economy in 2005
m oderation in dem and w as due to C hinese im porters
reducing their purchasing activities in the second half-
year in anticipation of the im pending changes in im port
duties. In line w ith PR C hinas com m itm ent under the
W orld Trade O rganisation, effective 1 January 2006, the
quota for edible oil im ports w as abolished and a
standardised im port tariff of 9% w as im posed across all
edible oils. This w ould be a positive developm ent for
palm oil exports to PR C hina.
M eanw hile, dem and for palm oil from the U S increased
substantially by 79.4% (534,137 tonnes; 2004: +28.7% ),
as U S food m anufacturers began to increase the usage of
palm oil as a substitute to other edible oils. Beginning 1
January 2006, the U S Food and D rug A dm inistration
(FD A ) w ould require food m anufacturers to label
products that contain trans fatty acid as clinical studies
have linked trans fatty acid to serious diseases. Palm oil,
w hich is trans fatty acid free, has benefited from this
regulation. D uring the year, purchases from India declined
further (-28.2% ; 2004: -44% ) as the discrim inatory
increase in im port tariff rates for palm oil com pared to
soybean oil had resulted in higher im port prices and,
consequently, low er dem and from Indian buyers.
The M alaysian palm oil industry continued to m ake
significant progress in term s of research and
developm ent. The M alaysian Palm O il Board (M PO B)
introduced 43 new technologies and products for
com m ercialisation in the industry, and undertook 312
research projects during the year. The new breakthroughs
w ere m ainly in developing cost-effective m illing and
refining techniques, im proving yields, m inim ising
w astage, eradicating diseases and creating higher value-
added palm -based products, as w ell as palm -based
biom ass.
A nother im portant developm ent in the palm oil industry
in 2005 has been the com m ercialisation of palm oil-
based biofuel at a global level. A m idst the increase in
energy prices, countries began to seek alternative sources
of energy, particularly from renew able resources. A m ong
the renew able energy resources, palm oil has distinct
advantages over other sources both in term s of price
com petitiveness as w ell as ready availability as M alaysian
palm oil stocks have consistently been above 1 m illion
tonnes over the last three years. M alaysia has pioneered
the developm ent of this technology through sustained
research and developm ent efforts w hich began a few
years ago. The current high energy price environm ent has
m ade it both feasible and necessary for M alaysia to
em bark on palm oil-based biofuel on a large scale. This
w ould help to m eet the higher dem ands in energy
consum ption from dom estic users, create a new source
of export earnings and stabilise the volatility in C PO price
m ovem ents.
In line w ith this developm ent, in A ugust 2005, the
G overnm ent announced the form ulation of the N ational
Biofuel Policy, w hich w ill be com pleted in 2006. The
policy w ould provide guidelines on biofuel usage for all
related sectors (particularly transportation, petroleum
com panies and palm oil industries), in addition to
standardising the B5 biodiesel m ixture for the dom estic
m arket (5% from processed palm oil, 95% from
petroleum diesel), and ensuring that the palm biodiesel
(chem ically know n as m ethyl ester) produced for the
external m arkets conform to international standards. A s
part of the biofuel policy, attractive incentives w ould also
be provided to encourage the grow th in the biodiesel
industry in M alaysia. To date, the interest in this industry
has been trem endous w ith five palm biodiesel plants in
the pipeline to com m ence operations in late 2006. A t
the sam e tim e, a pilot project to utilize B5 biofuel in
transportation vehicles w ould be im plem ented by
selected G overnm ent agencies.
A fter expanding at a strong pace in the last tw o years,
natural rubber production declined in 2005 by 3.8% to
1.12 m illion tonnes (2004: 1.17 m illion tonnes).
N evertheless, the output level rem ained above the key
threshold m ark of 1 m illion tonnes. The decline in
production during the year w as due entirely to adverse
w eather conditions. U sually rubber trees produce less
latex during the w intering m onths of February to A pril,
Production in m illion tonnes (RH S)
Export prices in sen per kg (LH S)
A verage yield in kg per tapped hectare (RH S)
sen
p Prelim inary for average yield
Source: M alaysian Rubber Board (M RB) and D epartm ent of Statistics.
'000 tonne
or kg
Graph 1.11
Natural Rubber: Production, Prices and Yield
2001 2002 2003 2004 2005p
0
50
100
150
200
250
300
350
400
450
500
550
0
200
400
600
800
1,000
1,200
1,400
C01 Malaysian Economy pg02-27 4/14/06, 12:20 25
26
but in 2005, exceptionally dry w eather conditions
during this period further aggravated the situation,
thus resulting in declines in output on a year-on-year
basis. In the last tw o m onths of the year, adverse
w eather, nam ely excessive rain, reduced tapping
activity by sm allholders, w ho account for alm ost 95%
of total M alaysian rubber output. A t the sam e tim e,
the total tapped areas continued to decline, by 4% to
767,340 hectares, as m ore rubber land holdings w ere
either being replanted w ith new rubber trees (2005:
23,000 hectares, w ith 94% replanted by
sm allholders), or in the process of being converted
into other econom ic activities during the year.
N evertheless, M alaysia retained its position as the
third largest producer of natural rubber after Thailand
and Indonesia, w ith a 13% share of w orld output.
O n the price front, M alaysian natural rubber prices
continued on a strong upw ard trend in 2005 in line
w ith developm ents in the global m arket. Prices of
SM R20, the M alaysian benchm ark, show ed a double-
digit grow th for the third consecutive year, rising by
13.4% to average 523 sen per kilogram m e in 2005
(2004: 461 sen/kg). In particular, prices rose
significantly in the second half of the year to reach
the highest daily traded price of 632 sen per
kilogram m e on 30 D ecem ber 2005, w hile the
m onthly high of 588 sen per kilogram m e w as
recorded in O ctober 2005. The firm ing of rubber
prices w as supported by seasonal and fundam ental
factors. O n one hand, global rubber supply w as
constrained due to adverse w eather conditions in the
key producing regions. M eanw hile, global dem and
continued to rem ain strong, particularly from
PR C hina, driven by the rapid expansion in the
autom otive industry.
The strong dem and coupled w ith the low production
resulted in a significant fall in global stocks to reach a
record low level, especially in the latter half of the
year, thus exerting upw ard pressure on prices. In
addition, natural rubbers closest substitute, synthetic
rubber, w hich is a petrochem ical product continued
to record higher prices in line w ith higher crude oil
prices. For the first tim e in 23 years, natural rubber
prices rose above synthetic rubber prices.
Export proceeds from rubber rose m arkedly by
11.3% to RM 5.8 billion in 2005, accounting for
1.1% of total gross exports. A lm ost one-third of the
rubber exports during the year com prised shipm ents
to PR C hina (2004: 26.1% ). For the fourth
consecutive year, PR C hina continued to increase its
rubber purchases at a double-digit rate (33.7% ;
2004: 39.2% ). The higher off-take w as fuelled by
strong dem and from tyre m anufacturers arising from
the rapid expansion in the dom estic autom otive
industry. A part from PR C hina, the other m ajor
buyers w ere the European U nion (EU ) countries,
particularly G erm any and France, accounting for
28.3% of total rubber exports.
In recent years, natural rubber has regained its
status as one of the key com m odities in the
M alaysian agriculture sector due to its strong
linkages to the overall econom y, both to the rural-
based sm allholders, as w ell as to key export-
oriented dow nstream rubber industries, such as
rubber glove and tyre m anufacturing. The strong
natural rubber prices have benefited the
sm allholders in term s of raising their incom e levels,
and this has been a significant factor in reviving
interest in the sector. Besides increasing tapping
activities, sm allholders have also adopted better
exploitation technologies such as the low frequency
tapping system (LITS) and G ood A gricultural
Practices by using stim ulants to im prove yields in
order to take advantage of the high prices.
In addition, the G overnm ent has also encouraged
rubber sm allholders to undertake replanting activities
to ensure sustainable production in the com ing years.
A s of end-2005, the program m e has succeeded in
replanting of rubber trees covering 23,000 hectares
of land, supported by rising confidence am ong
sm allholders and the effects of high rubber prices.
Sm allholders w ere also encouraged to replant latex
tim ber clones (LTC ) w hich yield higher latex and also
ensure an adequate supply of rubber w ood, once the
trees becom e too aged to produce latex. This w ould
help m eet the expected increase in dom estic dem and
from the local furniture industry in the com ing years.
Perform ance of other agriculture commodities,
com prising fisheries, livestock, as w ell as
m iscellaneous agriculture (w hich includes paddy,
fruits and vegetables) show ed a m ixed trend in 2005.
Value added in the livestock sub-sector increased by
4.7% , led m ainly by higher grow th in output of
poultry (+5.7% ), as m any large-scale poultry
operators, prim arily public-listed com panies took
advantage of the incentives provided by the
G overnm ent to m odernise their operations. Thus,
these com panies have invested substantially on
poultry rearing techniques using the clim ate-
controlled closed house system that not only
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 26
27
The Malaysian Economy in 2005
increased production, but m ost im portantly,
m aintained internationally-recognised hygiene
conditions. The increase in poultry output and the
assurance on quality have been the m ain factors
behind the substantial rise seen in external dem and,
in addition to m eeting dem and from the dom estic
food processing industries.
M eanw hile, output in the fisheries sub-sector
declined by 6.8% in 2005 to 1.42 m illion tonnes
(2004: 1.53 m illion tonnes), due m ainly to low er
m arine landings (2005: -9.2% ; 2004: 3.8% ) as a
result of the after-effects of the Tsunam i, as w ell as
the rise in diesel prices w hich affected fishing
activities. H ow ever, this w as partially m itigated by
the increase in aquaculture harvests, w hich
accounted for about 15% of the total output in the
fisheries sector (2005: +9.8% to 215,475 tonnes).
A quaculture products such as seaw eed, surim i and
ornam ental fish are high value-added activities
m ainly targeted for the export m arket. M eanw hile,
output of paddy also declined in 2005 due to
adverse w eather conditions.
In the forestry sector, logging activities declined in
2005 in line w ith M alaysias policy on conservation
by im plem enting sustainable forest m anagem ent
practices. Production of saw logs declined slightly by
0.8% to 21,334 m illion cubic m etres (2004: 21,509
m illion cubic m etres). N evertheless, global dem and
for M alaysian logs and saw n tim ber strengthened
significantly during the year, particularly from PR
C hina and the EU countries. The strong dem and w as
also due partly to the continued ban on exports of
logs and saw n tim ber by Indonesia since 2004.
C onsequently, average M alaysian log prices reached
a record high of RM 428 per cubic m etre in 2005.
A m idst the increase in export prices (7.7% ) and the
rise in volum e of 10.6% , export receipts from saw
logs rose significantly by 19.1% to RM 2.5 billion. In
term s of saw n tim ber, export proceeds strengthened
by 26% to RM 4.1 billion, due to higher volum e
(16.4% ) and prices (8.3% ).
W ith regards to the environm ent, M alaysia has been
at the forefront in driving initiatives on responsible
trade in tropical tim ber products. In the last few
years, the M alaysian tim ber industry has taken vital
steps in addressing the issue of illegal logging,
unsustainable forest m anagem ent and trade in
endangered tropical species. M alaysia has developed
its ow n tim ber certification schem e that assures
im porters and consum ers that M alaysian tim ber
products are from legal and sustainable sources. By
end-2005, the M alaysian Tim ber C ertification
C ouncil (M TC C ) has aw arded the C ertificate for
Forest M anagem ent to eight states in Peninsular
M alaysia and the U pper U lu Baram region in
Saraw ak, covering a total of 4.73 m illion hectares of
perm anent reserve forests.
In addition, 83 tim ber com panies had been certified
for chain-of-custody, ensuring that the tim ber
products are sourced from M TC C -certified forests
and are legally harvested. The credibility of these
certification efforts has been recognised by m ajor
buyers of M alaysian tim ber products, m ost recently
by a num ber of EU countries (U nited Kingdom ,
G erm any, France, Belgium and the N etherlands) that
have a public procurem ent policy aim ed at
eradicating im ports of tim ber from illegal sources. In
addition, the G overnm ent has also been vigilant in
enforcing regulations on trade in endangered tim ber
species (such as Ramin, Karas and Gaharu) from
neighbouring countries, in accordance w ith the
regulations under the C onvention for International
Trade of Endangered Species of W ild Flora and
Fauna (C ITES). A s part of the strategy on
im plem enting sustainable forest m anagem ent, the
G overnm ent also continued its efforts on forest
plantation. D uring the year, it w as announced that a
RM 200 m illion grant w ould be given to establish a
forest plantation program m e to reduce the
dependence on tropical tim ber.
M eanw hile, output of cocoa declined further by
16.3% to 27,964 tonnes (2004: 33,423 tonnes). The
decline in production w as m ainly attributable to
continued reduction in cultivated area to 33,313
hectares (2004: 41,612 hectares; 1990: 393,000
hectares) m ainly reflecting active conversion of
cocoa land into other crops. The low er production
w as also attributable to the lack of application of
inputs such as fertilizers and pesticides by cocoa
farm ers as a result of the rising cost of these inputs.
To encourage cocoa planting am ong sm allholders,
the M alaysian C ocoa Board im plem ented the C ocoa
Sm allholdersD evelopm ent Program m e. C urrently,
there are 4,860 farm ers w ho are actively involved in
the program m e, w ith a total area of 5,368 hectares.
The G overnm ent has also announced that cocoa
sm allholders w ill be given a 100% replanting grant,
in addition to the prevailing assistance given in the
form of high-yielding clones, disease-resistant
planting m aterials as w ell as technological
assistance.
C01 Malaysian Economy pg02-27 3/14/06, 9:11 PM 27
28
Mining Sector
The mining and quarrying (mining) sector
expanded by 0.8% in 2005 due entirely to higher
production of natural gas and condensates, w hile
crude oil production w as low er. Production of tin-in-
concentrates rose slightly by 2% to 2,800 tonnes.
D uring the year, the global energy m arket w as
characterised by high prices arising from the
continued fine balance betw een dem and and supply
of energy sources am idst the lack of spare output
capacity in the m ajor oil producing countries. A s a net
energy-exporting nation, M alaysia benefited from the
high prices, leading to a significant increase in export
proceeds from m inerals for the third consecutive year
(+27.1% to RM 52.3 billion; 2004: +38.2% to
RM 41.2 billion). O f significance, the proportion of
m ineral exports to total gross exports rose further to
9.8% (2004: 8.6% ), further underlining the
significance of the oil and gas industry to the
M alaysian econom y.
Value added in the mining
sector was sustained,
supported by strong
performance in natural gas
amidst the high energy prices.
Production of crude oil including condensates
averaged 726,860 barrels per day (bpd), representing a
decline of 4.9% from the level recorded in 2004
(762,318 bpd or +3.6% ). The low er output w as due
m ainly to the decline in production of crude oil, w hile
condensates rose sharply in line w ith the upw ard trend in
natural gas production. The low er production of crude
oil to 571,359 bpd (2004: 623,957 bpd) w as caused by
shutdow n of several oil installation facilities during the
year for repair and m aintenance purposes. N evertheless,
the production w as w ithin the range set for the year
under the N ational D epletion Policy, w hich has been
Table 1.7
Mining Sector: Value Added, Production and Exports
2004 2005p
Volum e and Value A nnual change (% ) Volum e and Value A nnual change (% )
Value added (RM million at 1987 prices) 17,372 3.9 17,504 0.8
Production
C rude oil and condensates (barrels per day) 762,318 3.6 726,860 -4.9
of which:
Crude oil (barrels per day) 623,957 0.6 571,359 -8.7
Condensates (barrels per day) 138,361 19.6 155,501 12.1
N atural gas - net
(m illion standard cubic feet per day) 5,196 4.0 5,800 11.3
Tin-in-concentrates (tonnes) 2,745 -18.3 2,800 2.0
Exports (RM million) 41,177 38.2 52,321 27.1
of which:
C rude oil and condensates
(000 tonnes) 18,090 1.0 17,719 -2.0
(U SD /barrel) 40.81 34.8 55.93 37.0
(RM m illion) 21,318 36.1 28,508 33.7
Liquefied natural gas (LN G )
(000 tonnes) 20,729 19.7 21,948 5.9
(RM /tonne) 824 6.8 947 15.0
(RM m illion) 17,079 27.9 20,790 21.7
Tin
(tonnes) 29,966 96.6 33,610 12.2
(RM /tonne) 31,585 68.6 27,827 -11.9
(RM m illion) 947 231.5 935 -1.2
p Prelim inary
Source: PETRO N A S
D epartm ent of Statistics, M alaysia
D epartm ent of M inerals and G eoscience, M alaysia
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 28
29
The Malaysian Economy in 2005
im plem ented since 1980 to ensure a sustained and
regulated developm ent of the countrys oil resources. The
depletion policy and discoveries of new oil fields over the
years has led to the expansion in M alaysias oil reserve
lifespan to 20 years (2002: 15 years).
M eanw hile, production of condensates increased at
a double-digit rate (12.1% ) for the fourth
consecutive year, to a record high of 155,501 bpd
(2001: 86,855 bpd). C ondensates, w hich in its
natural state is in gaseous form but condenses to
liquid upon production, shares the sam e properties
as that of the M alaysian light, sw eet crude oil. In
recent years, the contribution of condensates to
total M alaysian oil production has increased
significantly. C ondensates now account for 21.4%
of the total oil output of 726,860 bpd in 2005
(2001: 13% ), thus com plem enting the countrys
production of crude oil as the source of liquid fuel
for purposes of exports and fulfilling the dom estic
consum ption requirem ents. In 2005, export proceeds
from crude oil and condensates rose further by
33.7% to RM 28.5 billion (2004: +36.1% to RM 21.3
billion), thus accounting for an increased share of
5.3% of total exports (2004: 4.4% ).
Prices of the M alaysian benchm ark crude oil grade,
Tapis Blend, continued to strengthen by 39.3% to
U SD 57.26 per barrel in 2005 (2004: U SD 41.12 per
barrel) in line w ith developm ents in the global
energy m arkets. In particular, there w as a strong
dem and for light sw eetcrude oil, prim arily from
the U S m arket. U S refineries are m ainly catered to
process light sw eet crude that has low sulphur
content w hich enables uncom plicated and cost-
effective refining processing. Tapis Blend, a light
sw eetvariety, w hich has alw ays com m anded a
prem ium over other sourcrude, benefited further
during the year, as the prem ium w idened in 2005.
The increase in global crude oil prices during the year
w as supported by strong fundam entals. The m arket w as
influenced by a com bination of high global dem and and
tight supply am idst lack of spare production capacity
(2005: 1.5 m illion bpd; 2001: 4.5 m illion bpd) as a
result of under-investm ent by m ajor oil producing
countries in the last few years. A ccording to the
International Energy A gency, global dem and for crude
oil in 2005 rose to 83.3 m illion bpd, m ainly fuelled by
dem and from the U S and PR C hina, w hile global supply
w as only slightly higher at 84.1 m illion bpd. D espite the
O rganisation of Petroleum Exporting C ountries (O PEC )s
decision in July 2005 to effectively suspend its output
quota system am ong the m em ber countries by
producing at 28 m illion bpd, the highest level in over 25
years, prices continued to rem ain high. The high prices
w ere also partly due to the lack of refining capacities in
the m ajor consum ing nations, particularly in the U S,
w hich had resulted in an inability to sufficiently produce
refined petroleum products (such as gasoline and
distillates) to m eet the high dem and during the sum m er
and w inter seasons. C onsequently, the m arket w as
sensitive to m ovem ents in stock levels, particularly in the
U S, as it w as a reflection of the risk of short supply.
D uring the year, m arket sentim ent w as also highly
susceptible to events that could potentially disrupt
supply given that the m ajor producing countries w ere
operating at close to full capacity. Thus, w hen H urricane
Katrina struck the U S in late A ugust, w hich saw the
shutdow n of about 70% of the supply in the G ulf of
M exico region, oil prices (W est Texas Interm ediate and
Tapis Blend) soared close to the U SD 70 per barrel
threshold. M arket participants also rem ained highly
sensitive during the year to geopolitical events occurring
2001 2002 2003 2004 2005p
Barrels per day
(bpd)
Graph 1.12
Production of Crude Oil and Condensates
p Prelim inary
Source: PETRO N A S
C rude oil C ondensate
0
200,000
400,000
600,000
800,000
Jan-05 M ar-05 M ay-05 Jul-05 Sep-05 N ov-05
W est Texas Interm ediate (W TI)
Tapis Blend
U SD
per barrel
Graph 1.13
Crude Oil Prices (1-Month Futures) in 2005
D ec-05
H ighest level recorded on 1 Sept:
Tapis U SD 69.91
W TI U SD 69.47
35
40
45
50
55
60
65
70
75
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 29
30
in m ajor producing countries. The global benchm ark oil
prices, nam ely W est Texas Interm ediate and N orth Sea
Brent, averaged higher at U SD 56.59 and U SD 54.86 per
barrel, respectively (2004: U SD 41.40 and U SD 38.34 per
barrel, respectively). The Tapis Blend ended the year at
U SD 62.05 per barrel, w hich w as alm ost U SD 20 higher
than the price at 1 January 2005 (U SD 42.11 per barrel).
Natural gas production continued to strengthen in 2005,
grow ing by 11.3% to a record high of 5,800 m illion
standard cubic feet per day (2004: 5,196 m m scfd). The rise
in output w as driven by increasing dem and from traditional
buyers, consisting of dom estic pow er generators
(accounting for about 70% of total dom estic gas users) and
industrial users (prim arily in the m anufacturing sector), as
w ell as m ajor im porters of liquefied natural gas (LNG ). This
has subsequently led to increased utilisation rate at the
M LNG plants in Saraw ak, as w ell as the G as Processing
Plants (G PPs) in Peninsular M alaysia.
During the year, LNG prices also rose significantly in line
w ith developm ents in the global energy m arkets. In the
second-half of 2005, natural gas prices in the global
m arket strengthened sharply follow ing the disruption in
supply in the US in the afterm ath of Hurricane Katrina. The
M alaysian LNG export price rose to breach the RM 1,000
per tonne threshold for the first tim e in Septem ber, and
peaked at RM 1,066 in Decem ber. For the year as a w hole,
the M alaysian LNG export prices averaged RM 947 per
tonne, an increase of 15% (2004: 6.8% ).
G iven the higher prices and increase in export volum e,
LN G export proceeds for the year rose substantially by
21.7% to RM 20.8 billion (2004: RM 17.1 billion), resulting
in its share to total exports rising to 3.9% (2004: 3.6% ).
The higher export volum e (5.9% to 21.9 m illion tonnes;
2004: 20.7 m illion tonnes) w as m ainly due to higher
offtake from traditional buyers, particularly Japan and
Korea w hich rose by 9.1% and 3.8% respectively to cater
for their pow er generation industry.
The M alaysian oil and gas industry received further
boost in 2005 w ith new discoveries of oil and gas
resources follow ing som e m ajor discoveries offshore
Sabah from 2002 through 2004. D uring the year, seven
new offshore oil fields w ere discovered, of w hich four
w ere in Sabah, tw o in Saraw ak and one in Peninsular
M alaysia. This brought the total num ber of oil fields
discovered in M alaysia to 153. In addition, 12 new
production sharing contracts (PSC s) w ere signed during
the year, thus resulting in the total num ber of PSC s in
M alaysia to increase to 59. In 2005, 54 exploration w ells
and 78 developm ent and production w ells w ere drilled.
Production of tin-in-concentrates rose slightly by 2%
to 2,800 tonnes in 2005 (2004: 2,745 tonnes). Average
prices of tin, as traded on the Kuala Lum pur Tin M arket,
rem ained relatively high at U SD 7,356 per tonne (2004:
U SD 8,494 per tonne), supported by high dem and from
the electronics industry. In recent years, arising from the
environm ental guidelines set by the European U nion,
lead has been gradually replaced w ith tin as the m ain
m aterial in soldering activities in the electronics industry.
Construction Sector
Value added in the construction sector declined by
1.6% in 2005. The contraction w as due to w eak
activity in the civil engineering sub-sector follow ing
the com pletion of m any privatised infrastructure
Activity in the construction
sector was supported by the
residential and non-residential
sub-sectors. Civil engineering
meanwhile, continued to
contract.
projects in recent years. H ow ever, the residential and
non-residential sub-sectors continued to expand during
the year. The residential sub-sector w as supported by
favourable dem and, particularly in choice locations
am idst the attractive financing environm ent.
M eanw hile, the non-residential sub-sector benefited
from the buoyant business and retail activities.
The civil engineering sub-sector rem ained w eak, in
the absence of new large infrastructure projects. The
excess capacity in this sub-sector encouraged m any
M alaysian construction com panies to venture abroad.
A m ong the successfully secured contracts w ere in road
Table 1.8
Malaysia: Crude Oil and Natural Gas Reserves
1
A s at end
2004 2005p
Crude oil (including condensates)
Reserves (billion barrels) 5.29 5.38
Reserve/Production (year) 19 20
Natural gas
Reserves (trillion standard cubic feet) 85.20 84.92
Reserve/Production (year) 33 33
1
The N ational D epletion Policy w as introduced in 1980 to safeguard the
exploitation of the national oil reserves by postponing the developm ent and
controlling the production of m ajor oil fields (w ith reserves of 400 m illion barrels
or m ore).
p Prelim inary
Source: PETRO N A S
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 30
31
The Malaysian Economy in 2005
building, housing, pow er generation and airport
projects in the regional and M iddle Eastern nations.
In particular, India continued to be the m ajor
destination for M alaysian contractors given its
current huge spending on infrastructure
developm ent. O n the dom estic scene, ongoing
projects related to pow er generation plants, roads,
ports, w ater and sew erage continued to support the
civil engineering activity. Furtherm ore, construction
activity in the oil and gas sector w as high, supported
by investm ents in oil rigs, follow ing recent oil
discoveries in M alaysia.
A ctivity in the non-residential sub-sector continued to
im prove in 2005, underpinned by firm dem and for
office and retail space am idst the robust business
activities. O verall occupancy rates for office and retail
space im proved to 83.8% and 80% respectively as at
end-Septem ber 2005, from 82.1% and 79.6%
respectively at end-2004. Reflecting the increased
dem and, average m onthly rentals for prim e office space
in the Klang Valley edged up slightly from RM 46 per sq.
m etre in 2004 to RM 48 per sq. m etre in 2005, w hile
rentals for retail space in shopping com plexes rose from
RM 242 per sq. m etre to RM 254 per sq. m etre.
In the office segm ent, 17 new office buildings, m ainly
G overnm ent buildings, w ith a total space of 605,000
square m etres w ere added on to the m arket. A s a
result, total stock of office space as at end-Septem ber
2005 w as 14.1 m illion sq. m etres (end-2004: 13.5
m illion sq. m etres). M eanw hile, in the retail segm ent,
an additional 209,000 sq. m etres w ere com pleted,
bringing the total stock to 7.3 m illion sq. m etres.
D em and for retail space w as encouraged by the strong
grow th in the retail segm ent, supported by buoyant
private consum ption activities during the year.
In the case of hotels, 15 new hotels w ere com pleted
during the year, bringing the total sum to 2,239 hotels
in the country, providing 149,106 room s. Average
occupancy rates for hotels im proved to 63.6% from
60.8% in 2004, supported by increased tourist arrivals
and dom estic tourism activity.
The residential sub-sector rem ained im portant in
supporting construction activity during the year. D em and
for residential property w as sustained by interest in new
properties, especially in prim e locations. The increase in
Graph 1.14
Supply and Occupancy Rate of Purpose-Built Office
Space in Malaysia: 2001 - 2005
Existing Stock
N et lettable area
('000 sq.m )
O ccupancy rate (% )
O ccupancy Rate (% )
O ccupied Space
p Prelim inary
Source: N A PIC , Valuation and Property Services D epartm ent.
0
4,000
8,000
12,000
16,000
70
75
80
85
90
2001 2002 2003 2004 3Q 2005p
Graph 1.15
Supply and Occupancy Rate of Retail Space
in Malaysia: 2001 - 2005
Existing Stock
N et lettable area
('000 sq.m )
O ccupancy rate (% )
O ccupied Space
O ccupancy Rate (% )
p Prelim inary
Source: N A PIC , Valuation and Property Services D epartm ent
0
2,000
4,000
6,000
8,000
70
75
80
85
90
2001 2002 2003 2004 3Q 2005p
1999 2000 2001 2002 2003 2004 2005
Graph 1.16
Average Monthly Rentals for Prime Office and
Retail Space in the Klang Valley
1
RM /sq.m RM /sq.m
Prim e office space (LH S)
Prim e retail space (RH S)
1
Refers to Kuala Lum pur and Selangor.
Source: C H W illiam s Talhar & W ong Sdn. Bhd.
38
40
42
44
46
48
50
0
50
100
150
200
250
300
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 31
32
incom e levels am idst the stable em ploym ent m arket,
low interest rates and attractive financing packages
offered by financial institutions supported buying
interest. N evertheless, activity w as m ore m oderate
than the grow th seen in 2004, w hich w as induced by
the incentives provided under the 2003 Econom ic
Package. This w as evidenced by the low er take-up
rates in the first half of 2005 of 32.7% com pared to
48% in 2004. Purchasers becam e m ore discerning in
buying properties, due to the intense com petition
am ong developers and the w ide choice of new
concepts and products offered in the m arket. A m ong
the concepts that w ere w ell-received include the gated
com m unity concept and focus on green landscaping.
O n the supply side, 130,000 m ore new residential units
cam e on stream in the first nine m onths of 2005,
bringing the total stock to 3.59 m illion units. W hile
approvals of new housing projects continued to decline in
2005, new sales and advertising perm its increased
m arkedly by 15.9% (2004: -5.9% ). A m ong the new
launches, houses priced above RM 400,000 on average
accounted for 24% of the total launches in the Klang
Valley (average for 2004: 23% ), indicating the sustained
interest for higher-end properties in the city area.
N evertheless, providing affordable housing rem ained a
priority to the country. In Budget 2006, the G overnm ent
allocated RM 1 billion for low -cost housing program m es,
nam ely Program Perumahan Rakyat Dimiliki, Program
Perumahan Rakyat Disewa and Program Perumahan
Rakyat Bersepadu. The M inistry of H ousing and Local
G overnm ent (KPKT) had also taken the initiatives to
im prove the application procedure for low -cost housing.
A m ong the key changes instituted included liberalising
the ceiling of the m onthly salary of applicants from
RM 1,500 to RM 2,500, reducing the num ber of
supporting docum ents for applications and standardising
the procedure for all states. In 2005, a total of 55,209
low -cost housing units w ere constructed.
G iven the above developm ents, the M alaysian H ouse
Price Index increased m oderately by 1.7% in the first
half of 2005 (2004: 4.8% ). The slow est increase in
prices w as recorded in the high-rise and sem i-detached
categories. A m ong the states, Selangor, Terengganu,
Kelantan, Sabah and Saraw ak registered low er prices,
w hile in other areas, prices continued to increase.
M eanw hile, the overhang situation of new properties
show ed a m ixed trend. Latest data com piled by the
N ational Property Inform ation C entre (N A PIC ) of the
Valuation and Property Services D epartm ent show ed
that the overhang in residential property, retail shops Graph 1.17
New Launches of Residential Property
1

in Klang Valley by Prices
<RM 100,000
RM 100,001-RM 200,000
1
Landed property only
Source: Jones Lang W ooton
0%
20%
40%
60%
80%
100%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2004 2005
RM 200,001-RM 400,000
>RM 400,000
2000 2001 2002 2003 2004 1H 2005 p
Graph 1.18
Malaysian House Price Index
0
2
4
6
8
A nnual change (% )
p Prelim inary
Source: N A PIC , Valuation and Property Services D epartm ent
Table 1.9
Residential Property Indicators
2004 2005
U nits
Residential property transactions
U nits 195,241 181,762
Value (RM billion) 29.3 28.4
Approvals
1
174,671 169,960
Developers licences
N ew 1,071 1,209
Renew als 353 407
Sales and advertising permits
N ew 1,038 1,203
Renew als 1,510 1,726
Loans by banking system
- Value (RM billion)
O utstanding 132.9 149.2
A pprovals 35.7 36.6
1
U nits approved for construction by private developers.
Source: N A PIC , Valuation and Property Services D epartm ent, M inistry of
H ousing and Local G overnm ent and Bank N egara M alaysia
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 32
33
The Malaysian Economy in 2005
Table 1.10
Overhang of Residential Property in Malaysia by Price Range
RESID EN TIA L
U nits Share (% ) U nits Share (% )
Price Range
A s at end-2004 A s at end-Sept 2005p
RM 50,000 O r Less 5,245 33.7 3,397 19.8
RM 50,001 - RM 100,000 3,546 22.8 5,196 30.2
RM 100,001 - RM 150,000 3,063 19.7 3,523 20.5
RM 150,001 - RM 200,000 1,774 11.4 2,336 13.6
RM 200,001 - RM 250,000 651 4.2 974 5.7
M ore Than RM 250,000 1,279 8.2 1,753 10.2
Total 15,558 100 17,179 100
p Prelim inary
Source : N A PIC , Valuation and Property Services D epartm ent
and shopping com plexes w orsened, w hile that of
purpose-built office im proved. In the case of residential
property, the overhang increased to 17,179 units, w ith a
total value am ounting to RM 2.3 billion as at end-
Septem ber 2005 (end-2004: 15,558 units; RM 1.8
billion). These units w ere m ainly concentrated in Johor
and Selangor. The bulk of the properties w ere priced
betw een RM 50,001-RM 150,000.
Financing rem ained im portant in supporting the
construction sector. Loans approved by the banking system
for the broad property sector rose by 8.2% in 2005 (2004:
18.8% ), w hile loans disbursed increased by 4.3% (2004:
12.6% ). Loans outstanding to the broad property sector as
at end-2005 w as RM 229 billion, representing an increase
of 9.9% over 2004 (2004: 10.5% ). M eanw hile, loans
approved for the housing sector by other housing credit
institutions as a group increased by 11.6% to RM 7.6
billion in 2005 (2004: 15.7% ).
In the early part of the year, activity in the construction
sector w as tem porarily affected by the am nesty program
for illegal foreign w orkers that began in late 2004 and
ended on 28 February 2005. The slow return of legal
foreign w orkers caused som e delays in projects, but the
situation im proved after prom pt m easures taken by the
G overnm ent to alleviate the problem . D uring the year,
the G overnm ent also announced the decision to expedite
projects w orth RM 2.4 billion from the N inth M alaysia
Plan to rejuvenate the civil engineering segm ent.
A nother im portant developm ent that influenced activity
in the property sector during the year w as the release of
the G uidelines on Real Estate Investm ent Trusts (REITs
G uidelines) on 3 January 2005 by the Securities
C om m ission. This m arked the rebranding of property
trust funds (PTF) that have existed since the late 1980s
as REITs, in an effort to accelerate the grow th and to
establish a com petitive REITs industry in M alaysia. In the
last three years, the G overnm ent had also taken
m easures to create a m ore conducive environm ent for
the developm ent of REITs w ith the granting of special
incentives. These m easures include the follow ing:
i. Exem ptions from Real Property G ains Tax for gains
from disposal of real property to REIT or PTF;
ii. Exem ptions from stam p duty for instrum ents of
transfer of real property from individuals or
com panies to REIT or PTF;
iii.Exem ptions from incom e tax on chargeable incom e
distributed to unit holders of REIT or PTF;
iv. Incom e distributed to unit holders is taxed at their
respective tax rates. For non-residents, tax payable is
at 28% and is w ithheld by REIT or PTF;
v. The accum ulated incom e that has been taxed and
subsequently distributed is eligible for tax credit in
the hands of unit holders; and
vi.A llow ing selected fees (consultancy, legal and
valuation services) incurred in the establishm ent of
REITs to be tax deductable.
A s at end-2005, three REITs funds w ere listed on Bursa
M alaysia. A ssets of these REITs consist of office and
retail buildings in the Klang Valley.
DOMESTIC DEMAND CONDITIONS
Dom estic dem and conditions rem ained favourable in
2005, registering a strong grow th of 7.3% during the year
(2004: 7.5% ). G row th in aggregate domestic demand
w as supported m ainly by the buoyant expansion in private
sector activities. Despite concerns arising from rising oil
prices and the uncertain external outlook in the early part of
the year, consum er spending w as sustained at a high level
throughout the year. Consum ers benefited from the
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 33
34
continued increase in disposable incom es arising from high
export earnings and favourable job m arket conditions.
M easures by the G overnm ent to contain inflationary
pressures and the com petitive credit environm ent provided
further support to household spending. Private investm ent,
w hich has been on a positive trend since the second half of
2003, strengthened further in 2005, w ith positive grow th in
all sectors except construction. Business confidence w as
Domestic demand conditions
remained favourable in 2005,
supported mainly by the
buoyant expansion in private
sector activities. Public sector
expenditure remained
supportive of private demand.
Real aggregate dom estic dem and
Real private consum ption
Real base lending rate (RH S)
Percentage point
contribution to grow th
(% )
Graph 1.21
Real Interest Rate and Domestic Demand
2001 2002 2003 2004 2005
0.0
2.0
4.0
6.0
8.0
0.0
1.5
3.0
4.5
6.0
1999 2000 2001 2002 2003 2004 2005
Total household debt
Residential property
Transport vehicle
D eposit/Loan
% of total loans Ratio
Graph 1.22
Household Debt and Deposit/Loan Ratio
1998
0
10
20
30
40
50
60
70
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1999 2000 2001 2002 2003 2004 2005
Graph 1.20
GNP per Capita
A nnual change (% ) RM '000
N om inal G N P per capita (LH S)
N om inal G N P per capita grow th (RH S)
N om inal private consum ption grow th (RH S)
-5
0
5
10
15
20
-5
5
0
10
15
20
1999 2000 2001 2002 2003 2004 2005
Graph 1.19
Real Domestic Demand Aggregates
A nnual change (% ) A nnual change (% )
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
Real aggregate dom estic dem and (excl. stocks)
Real private consum ption
Real public expenditure
Real private investm ent (RH S)
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
sustained throughout the year, w hile positive cash flow s
enabled com panies to utilise internally-generated funds to
finance their capital expenditure. Nevertheless, the surplus
narrow ed som ew hat in 2005 and com panies also accessed
the financial system for funds, encouraged by the low cost
of financing. M eanw hile, the G overnm ent continued to
focus on developm ental efforts w hile im proving essential
services and the public delivery system in order to enable the
private sector to sustain the grow th m om entum . As a result,
the G overnm ent w as able to m aintain its policy of a gradual
consolidation of its fiscal position.
In spite of concerns on high oil prices and som e uncertainty
on the external outlook in the early part of the year, private
consumption w as sustained at a high level throughout
2005, grow ing by 9.2% for the year (2004: 10.5% ).
Consum er confidence rem ained buoyant as incom e
continued to grow due to high export earnings and
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 34
35
The Malaysian Economy in 2005
civil servants at the end of the year, boosted consum er
confidence. The im proved sentim ent w as reflected by
the increase in the C SI in the fourth quarter.
The increase in the O vernight Policy Rate (O PR) on 30
N ovem ber 2005 has not ham pered householdsability
to borrow , as interest rates rem ained below neutral
levels. H ouseholds continued to borrow , m ainly for the
purchase of residential properties and transport vehicles.
C onsum ersw illingness to spend by accum ulating debt
w as evidenced by the deposit-to-loan ratio staying
below 1 for the second consecutive year. N evertheless,
this increase in household debt rem ained m anageable.
The financial position of the household sector rem ained
relatively healthy w ith the non-perform ing loan (N PL)
ratios for both consum ption credit and credit card debt
declining further to 7.3% and 4.5% respectively in
2005 (2004: 8.1% and 4.7% respectively).
Follow ing the robust grow th in the previous year,
the strong m om entum of private sector capital
spending continued into 2005, despite the tougher
business clim ate due to rising crude oil prices and
the m ild dow n-cycle in the electronics sector in the
early part of the year. Private investment
continued to expand strongly during the year,
posting a grow th of 10.8% (2004: 25.8% ), spurred
by higher investm ent in the m anufacturing, services
and upstream oil and gas sectors. C om panies w ere
able to take advantage of their strong financial
positions to fund the bulk of the investm ent
through internally generated funds. In addition, the
supportive financing environm ent also prom oted
investm ent activities as evidenced by the loans
disbursed to businesses, w hich increased by 7.4%
during the year. Investm ent indicators such as
Table 1.11
Private Consumption Indicators
2004
2005
1Q 2Q 3Q 4Q Year
Sales of passenger cars
(incl. 4WD)
000 units 392.1 101.5 103.1 110.0 111.2 425.8
A nnual change (% ) 17.0 19.5 3.0 0.8 13.5 8.6
Imports of consumption
goods
RM billion 23.2 5.6 6.0 6.4 6.6 24.6
A nnual charge (% ) 24.1 10.7 4.3 5.2 4.2 5.9
Tax collection
Sales tax
(RM billion) 6.4 1.2 1.9 1.6 2.3 7.1
Service tax
(RM billion) 2.3 0.5 0.7 0.5 0.9 2.6
Narrow money (M1)
A nnual change (% ) 11.9 9.4 11.0 9.9 8.5 8.5
Loans disbursed by
banking system
C onsum ption credit
(excl. passenger cars)
A nnual change (% ) 16.8 7.0 12.6 10.4 10.7 10.2
Retail trade, restaurants
and hotels
A nnual change (% ) 19.5 21.8 21.1 19.1 6.3 16.5
MRA retail sales
A nnual change (% ) 8.0 4.8 10.2 n.a. n.a. n.a.
Credit card operation
Turnover spending
(RM billion) 36.8 9.9 9.8 10.8 11.4 41.8
A nnual change (% ) 19.2 15.7 12.8 12.2 13.0 13.4
MIER Consumer
Sentiments Index - 120.9 109.8 102.5 116.1 -
KL Composite Index 907.4 871.4 888.3 927.5 899.8 899.8
Commodity prices
C PO (RM /tonne) 1,664 1,363 1,418 1,387 1,423 1,398
C rude oil (U SD /barrel) 41 49 54 65 60 57
Rubber (sen/kg) 461 468 467 552 604 523
Graph 1.23
Investments, Capacity Utilisation and Profitability
% change
(% )
1Q
2002
2Q 3Q 4Q 1Q
2003
2Q 3Q 4Q 1Q
2004
2Q 3Q 4Q 1Q
2005
2Q 3Q 4Q
77
78
79
80
81
82
83
84
1/
Source: M alaysian Institute of Econom ic Research (M IER)
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
Investm ent
C apacity U tilisation
1/
(RH S)
RO E
favourable em ploym ent conditions. The M IER Consum er
Sentim ent Index (CSI), w hich reflects consum ers
assessm ents of their personal finances and the econom y,
peaked at 120.9 in the first quarter of 2005. How ever,
higher oil prices started to im pact consum er sentim ents,
w hich softened in the second and third quarters of the year.
To a large extent, consum ers w ere insulated from large
increases in oil prices through the G overnm ents subsidy for
fuel, though a portion of the subsidies w as rem oved. The
G overnm ent also announced a tem porary halt on price
increases on fuels and toll rates, and a reduction in road tax.
In the second half-year, im provem ents in labour m arket
conditions w ere also accom panied by higher com m odity
prices, especially prices of rubber, leading to rising
disposable incom e of households in both urban and
rural areas. This, together w ith the bonus paym ents to
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 35
36
2005
Graph 1.24
Private Investment by Sector (% share)
M anufacturing
34%
C onstruction
15%
Services
26%
A griculture
9%
M ining
16%
1998 1999 2000 2001 2002 2003 2004 2005
Source: M alaysian Industrial D evelopm ent A uthority
Graph 1.25
Private Investment in the Manufacturing Sector
RM billion N o.
D om estic approvals
Foreign approvals
N o of approvals
0
5
10
15
20
25
30
35
40
0
200
400
600
800
1000
1200
Table 1.12
Private Investment Indicators
2005
1Q 2Q 3Q 4Q Year
Sales of commercial
vehicles (incl. 4WD)
000 units 95.5 30.5 34.8 40.3 34.5 140.2
A nnual change (% ) 35.1 57.1 47.1 65.6 23.1 46.8
Import of capital goods
(RM billion) 55.5 12.3 15.5 17.0 15.9 60.7
A nnual change (% ) 36.0 0.7 16.3 21.0 0.3 9.5
Approvals by MITI
(manufacturing sector)
N o. of projects 1,101 181 306 276 263 1,026
C apital investm ent
(RM billion) 28.8 2.4 10.6 6.9 11.0 31.1
Foreign 13.1 0.7 5.9 3.9 7.5 17.9
Local 15.6 1.8 4.8 3.0 3.6 13.2
Loans disbursed by
banking system
M anufacturing sector
A nnual change (% ) 10.2 13.9 4.9 2.5 -2.0 4.5
C onstruction sector
A nnual change (% ) 10.4 4.5 0.8 5.8 -8.6 0.3
Business services
A nnual change (% ) 19.0 -12.4 1.5 24.2 9.4 5.1
Private Debt Securities
(excluding Cagamas)
Total funds raised
(RM billion) 28.0 5.3 6.8 9.7 13.8 35.7
N ew activities 13.0 1.2 3.6 5.6 7.3 17.7
Initial Public Offerings
(Bursa Malaysia)
Total funds raised
(RM billion) 4.0 1.9 2.0 0.7 0.8 5.3
MIER Business
Conditions Survey
Business C onditions Index - 104.1 106.0 102.7 100.5 -
C apacity U tilisation
Rate (% ) - 82.8 82.8 83.2 83.0 -
MSC-Status Companies
N o. of com panies 190 55 56 80 67 258
A pproved investm ent
(RM billion) 2.0 0.2 0.6 0.6 0.3 1.8
2004
im port of capital goods and sales of com m ercial
vehicles also indicated that private investm ent
continued to increase in 2005. Throughout the
year, the M IERs Business C onditions Index
rem ained above the 100-point threshold level,
reflecting the generally positive business sentim ent,
particularly in the m anufacturing sector.
Investm ent in the manufacturing sector rem ained
strong during the year, m ainly driven by
expenditure on new m achineries and equipm ent. In
2005, M ITI approved a total of RM 31.1 billion in
1,026 m anufacturing projects. O f the total, m ore
than half w ere joint projects w ith foreign partners,
pointing to continued interest from foreign
investors in the m anufacturing sector. A pproved
capital spending for expansion or diversification
activities are higher than for new projects,
signifying that m anufacturers w ere also venturing
into high value-added m anufacturing activities. The
approved projects w ere m ainly concentrated in the
electrical and electronic products, basic m etal
products, and chem ical and chem ical products
industries. O f im portance, the approved
investm ents, particularly in the electronics segm ent,
have continued to m ove tow ards technology and
skill-intensive projects. The em phasis and
prom otions on high value-added m anufacturing-
related activities have also attracted R& D projects
into the country, w here a num ber of electronics
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 36
37
The Malaysian Economy in 2005
com panies w ere planning to set up R& D centres,
and design and test operations in the country.
Investm ent w as substantially stronger in the services
sector due to notable developm ent of utilities
infrastructure and capacity expansion by transportation
com panies. H igher capital spending for the utilities sub-
sector w as attributed to the developm ent of pow er
plants and w ater projects. The independent pow er plant
(IPP) projects include IPP Tanjung Bin, IPP Jim ah, IPP
Sepangar Bay and IPP Teluk Salut. M eanw hile, the
spending on w ater projects w as largely for the Sungai
Selangor Project Schem e 3 (SSP3), the Storm w ater
M anagem ent and Road Tunnel (SM A RT) project as w ell
as the expansion and upgrading of w ater treatm ent
plants and w ater distribution in several states. In the
Source: M alaysian Industrial D evelopm ent A uthority
Electrical &
electronics
44%
Graph 1.26
Approved Manufacturing Investment by Industry,
2005 (% share)
Basic m etal
products
10%
C hem ical &
chem ical products
6%
Food
m anufacturing
5%
Scientific &
M easuring Equipm ent
5%
Transport
Equipm ent
5%
O thers
25%
transport sub-sector, port operators such as PTP, N orth
Port and W est Port continued to invest in im proving
port facilities and equipm ent arising from the need to
increase port capacity. A t the sam e tim e, investm ent on
air transport w as higher as com panies em barked on
fleet expansion program m es. M eanw hile, in the
telecom m unication sub-sector, cellular operators
continued to spend on im proving the reliability and
efficiency of netw orks, as w ell as optim ising and
upgrading existing netw ork equipm ent to cater for
high-speed m obile services. In the retail sub-sector, a
num ber of new outlets w ere established during the
year, particularly buoyed by strong consum er spending
activities.
In the mining sector, higher capital expenditure w as
predom inantly in the upstream oil and gas segm ent.
D uring the year, production-sharing contractors
accelerated exploration and production capital spending
due to rising oil prices and increasing dem and for crude
oil. O f im portance, intensified exploration during the
year w as spurred by aggressive exploration cam paign in
deepw ater and ultra-deepw ater oil fields. In addition,
discoveries of new oil and gas resources since 2002
continued to support capital spending in production
facilities and developm ent projects.
In 2005, a large part of investm ent in the construction
sector reflected activities from residential construction,
arising from the developm ent of new tow nships and
urban centres, w ith the em phasis on high-end property
projects. O n the other hand, capital spending on roads
w as low er due to the com pletion of tw o m ajor projects,
nam ely the Butterw orth O uter Ring Road and G uthrie
C orridor Expressw ay, as w ell as the delay in the
construction of the Kajang-Serem ban Expressw ay.
N evertheless, ongoing developm ent of several privatised
road projects such as the Senai-D esaru Expressw ay and
Jelutong Expressw ay continued to support investm ent in
the sub-sector.
C apital expenditure in the agriculture sector rem ained
largely driven by activities in com m ercial crop plantation.
The expenditure for the developm ent of com m ercial
crop plantations rem ained at high levels, especially for
palm oil, as stronger dem and and firm C PO prices have
encouraged further capital spending by private
plantation com panies. The expenditure w as m ainly to
expand and upgrade m illing capacity and support
replanting activities.
Public consumption increased by 5.9% in 2005,
m ainly on account of the continued high expenditure on
supplies and services, defence as w ell as em olum ents.
1995 1999 2000 2001 2002 2003 2004 2005
N ew investm ent
Source: M alaysian Industrial D evelopm ent A uthority
Reinvestm ent
Graph 1.27
Share of Approved New Investments and
Reinvestments in the Manufacturing Sector
%
90
80
70
60
50
40
30
20
10
0
100
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 37
38
The increased expenditure for supplies and services w as
largely to further im prove the adm inistrative m achinery
and delivery system of the public sector. Reflecting the
G overnm ents efforts to continue enhancing hum an
resource developm ent in strengthening the nations
productivity and com petitiveness, expenditure on
em olum ents rem ained high.
Public investment turned around to register a m arginal
grow th of 0.4% in 2005 (2004: -8.7% ). The Federal
G overnm ent continued to focus on developm ental
projects that im proved econom ic and social services
sectors of the country. M ost im portantly, these
program m es w ere im plem ented based on the em phasis
of achieving a greater balance betw een the developm ent
of urban and rural areas. In the econom ic sector,
expenditures w ere m ainly focussed on m odernising the
agriculture sector, im proving infrastructure in rural areas,
enhancing industrial grow th and im proving
transportation infrastructure. A t the sam e tim e, capital
expenditures for the social services sector w ere m ainly
allocated tow ards enhancing and upgrading of essential
services, nam ely education, training and health and
m edical services as w ell as provision of affordable houses
to the people. M eanw hile, capital expenditures by the
N FPEs w ere stronger during the year, largely attributed to
capacity expansion efforts and com m itm ent to im prove
efficiency by the N FPEs, such as Petroliam N asional
Berhad (PETRO N A S) and Telekom M alaysia Berhad (TM ).
D uring the year, investm ent by PETRO N A S increased
largely due to intensified exploration activities in the
upstream oil and gas sectors as w ell as expansion of
shipping fleet to cater for stronger dem and for LN G and
petroleum -related products. C apital spending by TM w as
also higher, m ainly for the deploym ent of new
infrastructure for residential and business prem ises as w ell
as provision of infrastructure in new areas w ith high
dem and for broadband services. M eanw hile, Tenaga
N asional Berhads investm ent continued to focus on
m aintenance activities and im provem ent projects, such as
upgrading and replacem ent program m es of pow er
transm ission and distribution system s.
D espite sustained grow th in consum ption, gross
national savings (GNS) increased further by 10.9% in
2005, in line w ith the expansion in nom inal gross
national incom e. In the private sector, both households
and the corporate sector continued to enjoy better
disposable incom es and cash flow s, as a result of higher
export earnings and better em ploym ent grow th during
the year. This enabled private sector savings to continue
to increase by 17.9% in spite of the strength of private
consum ption. The m ain source of the increase w as due to
higher corporate savings. N ew deposits placed by
business enterprises w ith banking institutions w ere higher
at RM 37 billion in 2005, com pared w ith RM 31.6 billion in
the previous year. M eanw hile, public savings continued to
expand by 2.8% in 2005, due m ainly to the strong
perform ance of the m ajor N FPEs during the year.
O verall, the share of G N S to G ross N ational Product
(G N P) rem ained high at 37.1% (2004: 37.3% ). This
high rate of savings has enabled M alaysia to continue to
finance its grow th prim arily from dom estic sources.
G iven a low er gross dom estic capital form ation
(including stocks), the savings-investm ent balance,
therefore, recorded a larger surplus of RM 77.8 billion or
16.4% of G N P in 2005.
PRICES AND EMPLOYMENT
Consumer Prices
In 2005, inflation em erged as one of the areas of
m acroeconom ic concern in the global econom y. A key
factor behind this developm ent w as the significant
increase in international oil prices over the course of the
year. M alaysia, as a sm all open econom y, w as not
insulated from this global phenom enon.
The inflation rate, as m easured by the annual change
in the C onsum er Price Index (C PI), increased from
1.4% in 2004 to 3% in 2005. The increase in
inflation during the year w as prim arily due to the
supply-related factors follow ing the increase in
international oil prices. C ore inflation, w hich is C PI
inflation excluding price-volatile item s and price-
adm inistered item s, rose to 2% (1% in 2004) during
the period. The rise in core inflation w as driven by
strong dom estic dem and, as favourable labour m arket
Graph 1.28
Gross National Savings and the
Savings-Investment Gap
RM m illion
G ross C apital
Form ation
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2000 2001 2002 2003 2004 2005
Savings-Investm ent G ap
Public Savings
Private Savings
G ross N ational Savings
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 38
39
The Malaysian Economy in 2005
conditions, a com petitive credit environm ent and high
com m odity prices supported incom e and spurred
consum er spending.
A ll categories in the C PI registered higher increase in
2005. The m ost significant increase in prices during the
year w as seen in the transport and com m unication and
food categories, both of w hich are sensitive to the
fluctuations in the prices of energy and non-energy
com m odities. It should be noted that although the
uptrend in international oil prices gained m om entum in
late 2004, the upw ard pressure on dom estic inflation
w as relatively less. This w as partly due to the buffer
provided by the subsidy on retail fuel prices and controls
on gas prices and pow er rates. The escalation on the
global price of crude oil how ever has exerted an
increasing burden on the G overnm ents operating
expenditure, w hile raising concerns over the
m isallocation of resources and costs of enforcem ent. In
addressing this issue, the G overnm ent has rem oved part
of the oil subsidy, thereby lim iting the inflationary
im pact on consum ers. D om estic retail fuel prices w ere
adjusted three tim es during 2005 (Table 1.13),
contributing approxim ately 0.4 percentage points to the
inflation rate for the year.
A lthough there w ere concerns that the increase in
dom estic oil prices w ould cascade dow n into the
prices of other goods, the subsequent outturn for
inflation w as rather m oderate. This could be
attributable to several factors. Firstly, labour
productivity, as m easured by the real sales per
em ployee in the m anufacturing sector increased by
-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
H eadline
Food
Beverages and tobacco
C lothing and footw ear
G ross rent, fuel and pow er
Furniture, furnishing, etc
M edical care and health expenses
Transport and com m unication
Recreation, entertainm ent, etc
M iscellaneous goods and services
Graph 1.29
Contribution to CPI inflation
Graph 1.29
Contribution to CPI inflation
percentage point
-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
2005 2004
Table 1.13
Changes in Prices of Administered Goods and
Services in 2005
Contribution
Effective %
to 2005
date
CPI items (weight: 12%)
increase
inflation
(in pct. points)
Jan-05 C hicken prices 14.6% * 0.29
Jan-05 Toll charges 10% 0.04
M ar-05 D iesel prices 6% 0.01
M ay-05 Public transport fares
1
6.7% * 0.10
M ay-05 Prices of retail petrol & diesel 7.4% 0.24
A ug-05 Prices of retail petrol products
2
6.8% 0.15
Sep-05 Prices of alcoholic
beverages & tobacco 7.1% ** 0.05
Total Contribution to Headline Inflation 6.50% 0.88
1
Includes public transport fares such as railw ay, ship (ferry), airlines, bus and taxi.
2
Includes retail petrol, diesel and cooking gas (LPG ).
* Average increase in 2005.
** Average increase post Budget-2006.
Source: D epartm ent of Statistics, M alaysia.
10% in 2005, surpassing the 0.8% grow th in the
real w ages per em ployee in the m anufacturing
sector. This, coupled w ith the intensification of
com petition am ongst producers and from im ports
have som ew hat contained the secondary effects
from higher oil prices. In addition, capacity
expansion am ongst businesses played a role in
increasing supply and m itigating possible dem and
pressures. A ctive surveillance and enforcem ent
efforts undertaken by the relevant G overnm ent
agencies also ensured that prices of controlled
essential goods and services are transparent and not
raised opportunistically.
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 39
40
In the M onetary Policy Statem ent (M PS) released in August
2005, the Bank stated that the cum ulative effect of
previous price adjustm ents w as expected to translate into
inflation peaking in the third quarter of 2005, and to
m oderate thereafter. How ever, it w as highlighted that
there rem ained considerable uncertainty on the direction
of oil prices. M onetary policy w ould therefore take into
account the need to ensure that the level of m onetary
accom m odation is balanced w ith the need to ensure price
stability. In the third quarter of the year, the econom y
began to show evidence of stronger econom ic grow th,
w ith indications that the m om entum w ould continue into
the fourth quarter and into 2006. As the risk of slow er
econom ic grow th dim inished, the balance tipped tow ards
the increased risks to inflation. Consequently, on the 30
Novem ber 2005, BNM raised the O vernight Policy Rate
(O PR) by 30 basis points to 3 percent.
Producer Prices
Producer price inflation, as m easured by the annual
change in the Producer Price Index (PPI), m oderated to
6.8% in 2005 (8.9% in 2004). Despite the strong increase
in crude oil prices during the year, the com m odity-related
categories registered a slow er annual grow th of 10.8%
(15.6% in 2004). This w as largely due to the consolidation
in the prices of crude palm oil and rubber in the first half of
the year. Excluding these com m odity-related categories,
producer prices increased slightly by 2.2% (2% in 2004)
due m ainly to the higher prices for food and live anim als;
and m achinery and transport equipm ent. M eanw hile, the
annual grow th in the PPI for im ported goods m oderated to
1.5% (2% in 2004), in part due to the increased global
com petition, increased supply from low cost producing
countries and the stronger ringgit against M alaysias
trading partners during the year.
Labour Market Developments
The dom estic labour m arket continued to be healthy and
stable in 2005. The unemployment rate rem ained
steady at 3.5% as both total em ploym ent and labour
force increased by 4.1% to 10.9 m illion and 11.3 m illion
respectively. Total retrenchm ents declined by 19% ,
Table 1.14
Price Indicators
W eight 2004 2005
Consumer Price Index A nnual change
(2000=100) (% )
100.0 1.4 3.0
of which:
Food 33.8 2.2 3.6
Beverages and tobacco 3.1 7.8 10.5
C lothing and footw ear 3.4 -1.8 -1.0
G ross rent, fuel and pow er 22.4 1.0 1.2
Furniture, furnishings and
household equipm ent and
operation 5.3 0.4 2.0
M edical care and health expenses 1.8 1.4 1.6
Transport and com m unication 18.8 0.8 4.4
Recreation, entertaim ent,
education and cultural services 5.9 -0.1 0.5
M iscellaneous goods and services 5.5 1.8 2.4
Consumer Price Index
D urable goods 9.4 0.2 0.4
Sem idurable goods 5.4 -0.9 -0.1
N on-durable goods 40.2 2.4 5.0
Services 45.0 1.0 2.1
Producer Price Index
(1989=100) 100.0 8.9 6.8
of which:
Local Production 79.3 10.3 7.9
Im ports 20.7 2.0 1.5
Source: D epartm ent of Statistics, M alaysia
Labour market conditions
remained healthy as vacancies
rose and retrenchments
declined.
Table 1.15
Labour Market Indicators
2001 2002 2003 2004 2005e
Labour force (000) 9,724.2 10,064.3 10,426.4 10,846.0 11,290.5
(annual change in % ) 1.6 3.5 3.6 4.0 4.1
Em ploym ent (000) 9,378.8 9,709.0 10,047.2 10,463.7 10,894.8
(annual change in % ) 1.1 3.5 3.5 4.1 4.1
U nem ploym ent rate (% of labour force) 3.6 3.5 3.6 3.5 3.5
Labour productivity (G D P/Em ploym ent)
(annual change in % ) -0.8 0.8 1.9 2.9 1.1
Real w age per em ployee in m anufacturing sector
(annual change in % ) 1.7 3.2 2.9 1.9 0.8
e Estim ate
Source: Econom ic Planning U nit
D epartm ent of Statistics, M alaysia
Bank N egara M alaysia
C01 Malaysian Economy pg28-66 3/14/06, 9:11 PM 40
41
The Malaysian Economy in 2005
reflecting the recovery in econom ic activities in the
second half-year follow ing slow er grow th in the second
quarter and the flexibility accorded to the em ployers to
take alternative m easures such as tem porary layoffs and
instituting pay cuts. In 2005, the num ber of job vacancies
increased to a record high of 304,500 positions (previous
high, 2002: 162,787 positions). N evertheless, the num ber
of unplaced job seekers w as also higher, though the
situation im proved tow ards year-end. M eanw hile, job
placem ents w ere stronger, reflecting increased efficiency
in labour-m atching process.
In 2005, low er retrenchments w ere recorded
follow ing the pick-up in econom ic activities in the
second half-year. Total retrenchm ents declined by 19%
to 16,109 persons (2004: 19,956 persons), w ith the
bulk occurring in the m anufacturing and selected
services sectors, in particular, the w holesale and retail
trade. M ost of the retrenched w orkers w ere
production-related w orkers (53% ) as w ell as those in
the professional and technical positions (17% ), and
sales and service w orkers (11% ). A m ong key reasons
cited for retrenchm ents during the year w ere high
costs of production, reduction in dem and for products,
and sale of com panies.
M ore jobs w ere available in 2005, especially during the
second half-year. Total job vacancies reported to the
M anpow er D epartm ent of the M inistry of H um an
Resources surged to 304,500 positions (2004: 49,975)
due in part to a new ruling that m akes it com pulsory
for em ployers to report job vacancies to the Electronic
Labour Exchange before they can apply for foreign
w orkers. H igher job openings w ere recorded across all
key sectors, especially in the agriculture, forestry and
fishery, construction and m anufacturing sectors. In
term s of total positions available, the m anufacturing
sector continued to generate the highest num ber of
vacancies, accounting for 37% of total job vacancies,
follow ed by the services sector (21% ). The bulk of
vacancies w ere for elem entary occupations, plant and
m achine operators and assem blers as w ell as for
clerical, m anagerial and professional positions.
M eanw hile, the num ber of unplaced job seekers
registered w ith the M anpow er D epartm ent increased
to 72,573 persons in 2005. H ow ever, the data is not
com parable w ith previous years because from M ay
onw ards, the registration period during w hich job
seekers are deem ed to be actively seeking jobs w as
lengthened from three m onths to six m onths. Based on
the new definition, the num ber of active job seekers
that w ere still unplaced as at end-year has m oderated
from M ay (78,546 persons) and from the peak
recorded in A ugust of 104,714 persons. Job
placements also increased, rising from 6,192 persons
in 2004 to 17,459 persons in 2005, reflecting in part
an im proved labour-m atching process, as w ell as som e
success in the G overnm ents initiatives to increase the
em ployability and m arketability of job seekers via skills
Total retrenchm ent
Retrenchm ent in the m anufacturing sector
Retrenchm ent in the services sector
Retrenchm ent in the agriculture & m ining sectors
Retrenchm ent in the construction sector
N um ber of w orkers
Source: M inistry of H um an Resources
Graph 1.30
Retrenchment according to economic sectors
2002 2003 2004 2005
0
5,000
10,000
15,000
20,000
25,000
30,000
N um ber of w orkers
Source: M inistry of H um an Resources
Graph 1.31
Reasons for Retrenchment
1 H igh production costs
2 Reduction in dem and for products
3 Sale of com panies
4 C om pany reorganisation and autom ation
5 Relocation to foreign countries
6 Relocation locally
7 C losure of com panies
8 O thers
2004
2005
0
1,000
2,000
3,000
4,000
5,000
6,000
1 2 3 4 5 6 7 8
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 41
42
retraining program m es and the nation-w ide job fairs to
raise aw areness regarding job opportunities. A large
proportion of successful job placem ents continued to
be recorded in the m anufacturing (38% ) and the
services (30% ) sectors.
The Beveridge C urve, w hich tracks the pattern of
unem ploym ent and vacancies in the labour m arket,
m oved alm ost vertically upw ards in 2005, reflecting the
fact that in spite of higher vacancies, the unem ploym ent
rate did not decline. This could m ean that further
im provem ents in the labour-m atching process w ere
needed. D espite efforts m ade by the G overnm ent to
publicise the Electronic Labour Exchange Program m e
(ELX), w hich has been in place since 2002, m any job
seekers (em ployed and unem ployed) w ere still unaw are
of the facility. The ELX provides free services to job
seekers from school leavers to graduates, and helps
them secure jobs. In order to increase the aw areness of
ELX to the job seekers, the M inistry of H um an
Resources plans to set up ELX booths in selected
shopping m alls and tw o m obile units equipped w ith
com puters and Internet access to traverse the country
especially in rural areas, to register job seekers and to
provide them w ith career guidance. M eanw hile, the
job clearing system w ithin the ELX also helps
em ployers to look for potential w orkers. In 2005,
17,625 em ployers utilised the ELX to advertise a total
of 304,500 job vacancies (2004: 5,553 em ployers and
49,975 positions). A lthough successful m atches via the
Exchange increased to 308,291 positions in 2005
(2004: 37,295 positions), only 17,459 persons w ere
recruited (2004: 6,192 persons). This could be due to
the tendency of em ployers to be m ore selective in
filling vacancies, as reflected in the C urves low er
elasticity, and also to the fact that that the num ber of
job placem ents could be under-reported as it is not
com pulsory for em ployers and job seekers to report
successful job placem ents.
O verall, m ost key econom ic sectors recorded higher
em ploym ent in 2005, except for the agriculture and
construction sectors. The services sector continued to
be the largest em ployer, engaging slightly m ore than
50% of total w orkers, particularly the w holesale and
retail trade, hotels and restaurants (18% ) and
governm ent services (10% ) sub-sectors, follow ed by
the m anufacturing (29% ) and agriculture, forestry and
fishery (13% ) sectors.
In 2005, nom inal wages w ere higher as m ore
em ployers linked their em ployeesannual increm ents
and bonuses to perform ance or productivity. W ages
also rose in part due to im proved labour m arket
conditions as w ell as to reflect the higher cost of living.
Graph 1.34
Total Employment by Sector
Source: Econom ic Planning U nit
0 1,000 2,000 3,000 4,000 5,000 6,000
C onstruction
A griculture &
M ining
M anufacturing
Services
(N um ber of person, '000)
2005 2004 2003
Source: Econom ic Planning U nit
D epartm ent of Statistics, M alaysia
A nnual change (% ) A s % of labour force
Graph 1.33
Output and Employment
Em ploym ent
Real G D P
Labour force
U nem ploym ent rate (RH S)
1
0
2
3
4
5
6
7
8
2001 2002 2003 2004 2005
3.0
3.2
3.4
3.6
3.8
4.0
U nem ploym ent rate (% )
Vacancy rate (% )
Graph 1.32
Beveridge Curve for Malaysia (1998-2005)
Source: Econom ic Planning U nit
M inistry of H um an Resources
Bank N egara M alaysia
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8
1999
2000
2001
2002
1998
2003
2004
2005
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 42
43
The Malaysian Economy in 2005
The Salary and Fringe Benefits Survey undertaken
by the Malaysian Employers Federation (M EF)
show ed a higher increase in the average private
sector salary of 5.8% in 2005 (2004: 5.6% ), w ith
both categories of em ployees, executives (5.9% )
and non-executives (5.7% ), receiving higher salary
increases. O n a sectoral basis, the average salary
increase in the non-m anufacturing sector (5.9% )
continued to outpace that of the m anufacturing
sector (5.7% ) (2004: 6.1% and 5% respectively).
The average m inim um m onthly salary offered to
those w ith a basic degree w ithout prior w orking
experience w as m arginally higher at RM 1,707
(2004: RM 1,666).
Sim ilarly, findings from the Salary, Benefits and
Em ploym ent C onditions Survey in the
M anufacturing Sector conducted by the
Federation of Malaysian Manufacturers also
revealed higher salary increm ents to em ployees in
2005. The average salary increm ent given to
em ployees w as 6.3% (2004: 5.6% ). M eanw hile,
the average basic salary offered to a fresh graduate
w ith a degree qualification w as RM 1, 917 (2004:
RM 1, 799).
Productivity is a m easure of the efficiency w ith w hich
inputs are transform ed into outputs w ithin the
production process. Total factor productivity grow th
captures productivity increase arising from
im provem ents in utilisation of factor inputs due to
technological process and overall efficiency
im provem ent. Recent estim ates by Bank N egara
M alaysia show ed that total factor productivity im proved
in 2005, registering a grow th of 3% (2004: 2.7% ),
indicating m ore efficient use of resources and
technology. A t the sam e tim e, data from the M onthly
M anufacturing Survey conducted by the D epartm ent of
Statistics, M alaysia show ed that labour productivity, as
m easured by real sales per em ployee, rose by 10% ,
surpassing the 0.8% grow th in real w age per em ployee.
A lm ost all the m anufacturing industries such as
petroleum and chem icals, basic m etal, E& E, textiles,
transport and off-estate recorded higher grow th in
labour productivity vis--vis w ages. M eanw hile, real
labour productivity for the w hole econom y, as m easured
by real G D P per w orker rose by 1.1% during the year.
In order to enhance flexibility in the labour m arket to
im prove com petitiveness, the G overnm ent has
advocated the use of a productivity-linked w age
system (PLW S). By im plem enting PLW S, com panies
w ould be able to put in place a flexible and
com petitive w age system that w ould enable them to
respond quickly and effectively to changing business
conditions, leading to higher productivity gains, low er
costs and im provem ent in com petitiveness. In addition,
a PLW S w ould also provide a clear incentive to w orkers
to upgrade their perform ance and productivity. For
em ployees, high perform ers w ould reap m ore benefits.
PLW S com ponents include non-contractual bonuses,
bonuses based on profits, and salary increm ents based
on m erit or perform ance. Industry data show ed that
m ore com panies are adopting PLW S. A ccording to the
M EFs 2005 Survey, about 80% of its respondent
com panies linked salaries to perform ance for the
executives, and 74% for non-executives. Sim ilarly,
latest available data from the N ational Productivity
C orporation show ed that out of 322 collective
agreem ents (C A s) signed in 2004, a total of 201 or
62% contained PLW S com ponents (2003: 45% out of
367 collective agreem ents). In the agriculture sector, all
of the eight C A s contained PLW S com ponents,
com pared to 83 (77% ) in the services sector, and 110
(53% ) in the m anufacturing sector.
A lthough the G overnm ent has alw ays encouraged
em ployers to hire m ore local w orkers and to adopt
labour-saving devices such as increased m echanisation
and autom ation to achieve higher efficiency and
productivity, foreign workers still play a m ajor role in
alleviating labour shortages in selected sectors of the
econom y. A s such, in 2005, the G overnm ent allow ed
registered foreign w orkers w hose contracts have
expired to change em ployers w ithin the sam e
econom ic sector as long as their w ork perm its w ere
still valid. In addition, to ensure a m ore efficient system
Graph 1.35
Manufacturing Sector: Output and Productivity
Value added at constant price
Real sales per em ployee
Real w ages per em ployee
Source: D epartm ent of Statistics, M alaysia
Bank N egara M alaysia
-5
-10
0
5
10
15
20
2001 2002 2003 2004 2005
A nnual change (% )
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 43
44
of recruiting foreign w orkers, the G overnm ent
established a O ne-Stop C entre to expedite processing
of applications for foreign w orkers, elim inate the use of
m iddlem en or agents and to reduce red tape in the
G overnm ent sector. The C entre w ould process
applications w ithin 24 hours, thereby speeding up the
adm inistrative processes significantly. The C entre
com m enced operations in A ugust 2005 and w as
m anned by officers from relevant governm ent agencies,
including M inistry of H om e A ffairs, M inistry of
International Trade and Industry, M inistry of A griculture
and A gro-based Industry, M inistry of Plantation
Industries and C om m odities, C onstruction Industry
D evelopm ent Board and M inistry of H um an Resources.
The m ajor changes in the process of hiring foreign
w orkers are as follow s:
N ew levy system for foreign w orkers, w hereby
rates differ according to the location (Peninsular
M alaysia or East M alaysia) and sector of econom ic
activity. For instance, foreign w orkers em ployed in
the services sector in Peninsular M alaysia are
subjected to a higher levy com pared to that in
Sabah and Saraw ak.
A n increase in the levy for each foreign w orker
engaged in the plantation and services sector in
Peninsular M alaysia to RM 540 and RM 1,800 per
annum respectively (previously: RM 360 and
RM 1,200 respectively). The levy for hiring m ore
than one m aid is also increased to RM 540 per
person (previously: RM 360).
To ensure that em ployers hire only the required
num ber of w orkers, em ployers are required to pay
the levy at the C entre based on the num ber of
foreign w orkers approved.
Em ployers are required to register w ith the
M anpow er D epartm ent before applying for
foreign w orkers. Em ployers also need to advertise
job openings in the Job C learing System to give
local job seekers priority in applying for jobs. If the
positions rem ained unfilled, then com panies are
allow ed to engage foreign w orkers.
Em ployers need to attend an interview at the
C entre, thereby elim inating the need for
m iddlem an and the potential for fraud.
M eanw hile, beginning 1 February 2006, the
G overnm ent also requires all non-professional foreign
w orkers (except Indonesians) to attend an induction
course on com m unication skills, M alaysian culture and
law s, conducted at centres in the source countries in
collaboration w ith M LVK-approved training centres in
M alaysia. Foreign w orkers w ho com pleted the course
w ould be given the C ertificate of Eligibility, w hich is a
pre-requisite for a w orking visa in M alaysia.
In 2005, the G overnm ent undertook m easures to reduce
the num ber of illegal foreign workers and to im prove
the security of the population. The A m nesty Program m e
that w as launched on 29 O ctober 2004 w as extended to
end-February 2005. A ltogether, about 89,510 illegal
w orkers left M alaysia in the first tw o m onths of the year
(O ctober - D ecem ber 2004: 309,248 persons), the
m ajority of w hom w ere Indonesians (84% ), follow ed by
Indian nationals (5% ) and Bangladeshis (3% ).
N evertheless, there w ere still som e illegal m igrant
w orkers w ho chose to rem ain in M alaysia despite
G overnm ent efforts to legitim ise them . Thus, on 1 M arch,
the G overnm ent m ounted a full-scale operation called
Ops Tegas involving stricter enforcem ent. D uring the
period from 1 M arch to 31 D ecem ber, 11,916 m ore
illegal m igrants w ere arrested.
Although the Am nesty Program m e w as designed to allow
the speedy return of the now -legitim ised foreign w orkers
to M alaysia, delays em erged due to som e adm inistrative
bottlenecks in the m ajor source country, Indonesia. In
M arch, the slow return of legal foreign w orkers created a
tem porary shortfall in labour in the m anufacturing,
construction and plantation sectors. Hence, the
G overnm ent lifted the tw o-m onth freeze on hiring of new
foreign w orkers in April, and allow ed foreign w orkers from
a num ber of different countries such as Vietnam , Pakistan,
India, Nepal and M yanm ar to w ork in M alaysia.
A s at end-year, total registered foreign workers in
M alaysia num bered 1,815,238 persons, representing an
increase of 23.5% from the previous year (2004:
1,470,090 persons). The large increase reflected in part
new hires as w ell as the success of the G overnm ents
A m nesty Program m e w hereby som e illegal m igrant
w orkers returned to M alaysia as registered foreign
w orkers. In total, foreign w orkers account for about
16.7% of total em ploym ent and are engaged m ainly in
the m anufacturing (32% ), plantation (24% ) and
construction (16% ) sectors, as w ell as dom estic helpers
(18% ). In term s of nationalities, Indonesian w orkers still
constitute the largest group w ith 67% , follow ed by
N epalese (11% ) and Indian nationals (7% ).
In 2005, the G overnm ent intensified efforts to address
the rising num ber of unemployed graduates.
A ccording to a w eek-long survey conducted by the
Econom ic Planning U nit in Septem ber, nearly 60,000
graduates w ere jobless, w ith m ost being unem ployed for
m ore than one year. A m ong key reasons cited for being
jobless include no job experience; w eak com m and of the
English language and a lack of com m unication skills; and
possessing university degrees that w ere not relevant to
m arket needs. The large num ber of unem ployed
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 44
45
The Malaysian Economy in 2005
graduates is a concern as it could ham per the countrys
aim to be a know ledge-based econom y. Therefore, in
2005, the G overnm ent continued to focus on training
and em barked on various program m es to address the
issue of m ism atch of skills betw een the unem ployed
graduates and m arket requirem ents. The status of som e
of the program m es and training schem es are as follow s:
Graduate Training Scheme III: Launched in
A ugust 2005, the Schem e aim s to equip local
graduates w ho have been unem ployed since year
2003, w ith specialised skills such as w eb publishing
and application, tourism (tourist guide) and event
m anagem ent, IC T and English language am ong
others. A total of 11 courses w ere offered, each
running for about tw o-and-a-half to five m onths.
A bout RM 100 m illion has been allocated for this
Schem e, w ith plans to train 15,500 unem ployed
graduates. In 2005, 7,992 unem ployed graduates
enrolled in the program m e, m ainly in English
language courses, follow ed by executive
developm ent and w eb-based courses.
Graduate Reskilling Scheme: This Schem e
targets engineering and selected technical
graduates w ith no previous em ploym ent history.
The objective of the Schem e is to upgrade skills
and know ledge of graduates in related technical
fields, such as m anufacturing-plant operation and
m aintenance in the autom otive industry,
sem iconductor chip design, and supply chain
m anagem ent. C ourses are of C ertificate level, and
conducted in skills developm ent centres and
selected participating colleges and universities. A s
at end-2005, a total of 2,370 graduates have
participated in the courses.
Graduate Apprenticeship Programme: This
program m e w as initiated in 2005 and m anaged by
the M inistry of H igher Education. A total of 79
skills-related courses are offered in various public
universities, w ith apprenticeship in selected private
com panies. U p till m id-Septem ber, a total of 9,225
graduates benefited from this program m e.
National Dual Training Scheme: The
program m es overarching objective is to produce
know ledge w orkers that m atch industry needs.
The tw o-year training program m e, sim ilar to that
im plem ented in European countries, consists of
tw o com ponents 20-30% of training being
theoretical in nature, conducted in selected
N ational Vocational Training C ouncil (Majlis
Latihan Vokasional Kebangsaan, M LVK) training
institutes; and the balance in the form of practical
training in various com panies, including
G overnm ent-linked ones as w ell as m ultinational
firm s. Launched in July 2005, participants w ould
be trained in four specialised areas, nam ely
autom otive m echatronic; plant operation in the
petrochem ical, oil and gas industry; process
autom ation in industrial electronics industry; as
w ell as tool m aking (m ould and dye). The first
intake has benefited about 71 school leavers,
university graduates and em ployed w orkers. U pon
com pletion of the 2-year training program m e,
participating com panies can choose to absorb the
trainees into their w orkforce.
Attachment and Training Scheme: Introduced in
2001, the Schem e seeks to provide unem ployed
diplom a and degree graduates w ith w ork
experience, thereby im proving their chances of
getting jobs. Trainees w ere attached to G overnm ent
departm ents and agencies and w ere exposed to IC T,
English language and statistics or research
m ethodologies courses. A s at end-2005, seven out
of eight program m es under this schem e w ere
com pleted, benefiting about 38,210 graduates.
The cost of the training program m es is w holly borne
by the G overnm ent and to attract further
participation, trainees w ere provided w ith m onthly
allow ances of RM 350. In O ctober, in view of the
higher cost of living, the allow ance w as increased to
RM 500 per m onth. To further encourage the private
sector to provide em ploym ent opportunities to
unem ployed graduates, the 2006 Budget proposed
that double deduction be given on the allow ances
paid by com panies listed on Bursa M alaysia to
participants of U nem ployed G raduate Training
program m e. This incentive w ould be available for
three years and is expected to benefit at least 1,000
unem ployed graduates. The G overnm ent also
approved additional RM 100 m illion for training of
unem ployed graduates. M eanw hile, Skills Training
C entres at the state levels w ould increase student
intakes and introduce new courses under the
Industrial Skills Enhancem ent Program m e. For
unem ployed graduates w ho are interested in
participating in econom ic activities, the G overnm ent
intends to im plem ent Young EntrepreneursSchem e
that focuses on IC T, tourism , halal products, and food
processing and packaging. In addition, the PRO SPER
G raduate Program m e seeks to encourage graduates
to becom e entrepreneurs. A n initial batch of 200
graduates is expected to benefit from the program m e
in 2006, each getting RM 50,000 in financing aid to
assist them in setting up businesses.
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 45
46
In 1993, the Human Resource Development Fund
(H RD F) w as established w ith m atching grant from the
G overnm ent to encourage the private sector em ployers in
the m anufacturing and services sectors to retrain and
upgrade the skills of their em ployees. The H RD F operates
on the basis of levy system , w hereby em ployers w ho have
paid the levy w ill qualify for training grants from the Fund
to defray or subsidise training costs for their M alaysian
em ployees. The rate of financial assistance is 100% of
the allow able costs incurred for training in M alaysia and
up to 50% for costs incurred overseas, subject to the
availability of levy in the em ployersaccounts w ith
Pembangunan Sumber Manusia Berhad (PSM B) w hich
adm inisters the Fund. In 2005, the PSM B approved
535,266 training places, w ith financial assistance of
RM 228.7 m illion. A m ong others, the PSM B offers
training for retrenched and unem ployed w orkers as w ell
as run apprenticeship program m e for SPM school leavers.
G iven the increasing im portance of the services sector in
term s of its contribution to the econom y and its need for
know ledge w orkers, the scope of the PSM B A ct 2001
w as expanded to include m ore services industries such as
port services; w arehousing services; R& D ; support services
and m aintenance engineering; hyperm arkets,
superm arkets and departm ent stores; security services;
private hospitals; and direct sales. W ith the inclusion,
em ployers in these industries w ould need to contribute
to the developm ent levy for the purpose of training,
retraining and upgrading the skills of their em ployees so
as to be in line w ith business needs and the countrys
econom ic strategy.
EXTERNAL SECTOR
Balance of Payments
The overall balance of payments rem ained strong
and recorded a surplus in 2005. The larger current
account surplus w as due m ainly to a stronger goods
surplus, reflecting sustained expansion in com m odity
Graph 1.36
HRDF: Number of Training Places Approved
1993 1995 1997 1999 2001 2003 2005
N um ber of training places
Source: Pem bangunan Sum ber M anusia Berhad
0
100,000
200,000
300,000
400,000
500,000
600,000
D irect investm ent Portfolio investm ent
Graph 1.37b
Capital and Financial Account
e Estim ate
-50
-40
-30
-20
-10
0
10
20
30
40
2003 2004 2005e
RM billion
O ther investm ent - official sector O ther investm ent - private sector
Balance on capital and financial account
N et international reserves
Graph 1.37c
Net International Reserves
RM billion
Balance on capital and financial account
Balance on current account
-50
0
50
100
150
200
250
300
2003 2004 2005
Graph 1.37a
Current Account
G oods exports
Balance on services
and incom e
e Estim ate
G oods im ports
Balance on current
account (RH S)
-100
0
100
200
300
400
500
600
2003 2004 2005e
RM billion
0
10
20
30
40
50
60
70
80
RM billion
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 46
47
The Malaysian Economy in 2005
The larger current account
surplus was due mainly to a
strong trade surplus, driven by
the continued expansion in
manufactured and commodity
exports, and an improvement
in the income account.
Current Account
In 2005, the current account continued to record a
large surplus of RM 77.8 billion, equivalent to 16.4%
of G N P (2004: RM 56.5 billion or 13.3% of G N P),
due to a larger surplus in the trade account and, to a
lesser extent, an im provem ent in the incom e
account. The export grow th w as underpinned by an
expansion in m anufacturing exports and higher
prices for com m odity exports. A larger outflow in
other services account and higher paym ents for
travel abroad led to a larger deficit in the services
account. The incom e account recorded an
Table 1.16
Balance of Payments
Item
2004 2005e
+ - N et + - N et
RM m illion
G oods 481,240 376,766 104,474 536,931 410,476 126,455
Trade account 480,740 400,077 80,663 533,788 434,010 99,778
Services 63,717 72,496 -8,780 72,202 82,452 -10,249
Balance on goods and services 544,958 449,264 95,694 609,133 492,928 116,205
Incom e 16,023 40,572 -24,549 20,469 41,937 -21,470
C urrent transfers 1,700 16,333 -14,633 1,131 18,094 -16,963
Balance on current account 562,681 506,169 56,511 630,734 552,960 77,772
% of GNP 13.3 16.4
C apital account
Financial account 15,083 -41,952
D irect investm ent 9,739 2,711
Portfolio investm ent 33,829 -11,881
O ther investm ent -28,485 -32,782
Balance on capital and financial account 15,083 -41,952
Errors and om issions 11,467 -23,000
of w hich:
Foreign exchange revaluation gain (+) or loss (-) 7,997 -15,496
Overall balance 83,061 12,820
Bank Negara Malaysia international reserves, net 253,513 266,334
USD million equivalent 66,714 70,483
N ote: N um bers m ay not necessarily add up due to rounding.
e Estim ate
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
exports and continued grow th in m anufacturing
exports. M eanw hile, the financial account recorded
a net outflow attributed m ainly to the unw inding of
portfolio positions in the fourth quarter and higher
external loan repaym ents by the official sector. Errors
and om issions, including exchange loss from
revaluation of Bank N egara M alaysias international
reserves due to the strengthening of the ringgit
against m ajor currencies, w as RM 23 billion.
Revaluation losses on reserve holdings arising from
the appreciation of the ringgit against the m ajor
currencies am ounted to RM 15.5 billion. A fter
adjusting for errors and om issions, the overall
balance of paym ents recorded a surplus of RM 12.8
billion. A s a result, the net international reserves of
Bank N egara M alaysia increased by RM 12.8 billion to
RM 266.3 billion (U SD 70.5 billion) as at 31 D ecem ber
2005. The reserves increased further to RM 272.7
billion or equivalent to U SD 72.2 billion as at 28
February 2006. This reserves position is adequate to
finance 7.6 m onths of retained im ports and cover
6.7 tim es the short-term external debt. M alaysias
reserves rem ained usable and unencum bered.
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 47
48
Table 1.17
Gross Exports
2005p
RM m illion A nnual change (% ) % share
Manufactured goods 429,873 10.1 80.5
of which:
Electronics, electrical m achinery and appliances 282,779 10.0 53.0
Electronics 208,232 10.4 39.0
Semiconductor 89,967 0.7 16.9
Electronic equipment & parts 118,265 19.1 22.2
Electrical m achinery & appliances 74,547 8.9 14.0
Consumer electrical products 22,632 2.1 4.2
Industrial & commercial electrical products 28,608 11.0 5.4
Electrical industrial machinery and equipment 20,476 15.1 3.8
Household electrical appliances 2,831 3.9 0.5
C hem icals & chem ical products 29,718 7.0 5.6
M anufactures of m etal 17,157 6.3 3.2
O ptical and scientific equipm ent 12,318 6.5 2.3
Textiles, clothing and footw ear 10,520 1.9 2.0
W ood products 8,860 2.1 1.7
Food 8,488 9.2 1.6
Furniture & parts 7,666 6.1 1.4
Transport equipm ent 6,993 31.3 1.3
Rubber products 6,777 12.3 1.3
Agricultural commodities 37,421 3.4 7.0
of which:
Palm oil 19,036 -5.3 3.6
Rubber 5,787 11.3 1.1
Saw n tim ber 4,051 26.0 0.8
Saw logs 2,465 19.1 0.5
Minerals 52,321 27.1 9.8
of which:
C rude oil and condensates 28,508 33.7 5.3
LN G 20,790 21.7 3.9
Tin 935 -1.2 0.2
Other exports 14,173 9.5 2.7
Total 533,788 11.0 100.0
p Prelim inary
Source: D epartm ent of Statistics, M alaysia
im provem ent during the year due m ainly to higher
earnings from larger reserves as w ell as sustained
profits and dividends accruing to M alaysian
com panies investing abroad. The current transfers
account recorded a higher outflow attributable to
the one-off rem ittance by illegal foreign w orkers
under the A m nesty Program m e in the first tw o
m onths of 2005.
D espite the global sem iconductor dow n-cycle in the
first half of the year, gross exports expanded at a
double-digit rate of 11% during the year (2004:
20.8% ). The grow th w as due to the strong
perform ance in the com m odities sector, particularly
m ineral exports (27.1% ) underpinned by the higher
energy prices. Receipts from m anufacturing exports
also rem ained relatively strong during the year,
expanding by over 10% , w hile agriculture exports
rose at a m oderate rate of 3.4% . The increase in
overall exports w as reflected both in term s of higher
volum e (8% ) as w ell as unit value (3.2% ).
Receipts from manufactured goods grew by 10.1%
in 2005 (2004: 19.7% ). A rising from the slow dow n
in the global sem iconductor cycle, grow th in exports
of E& E products grew m oderately by 10% (2004:
15.3% ). The slow dow n in exports of sem iconductors
and electrical products w as cushioned by the
continued strength in shipm ent of com puters and
parts. Exports of chem ical products expanded at a
slow er pace of 7% in 2005 (2004: 31% ) due m ainly
to the slow dow n in exports of organic chem icals,
particularly dem and for oleochem icals from the
Peoples Republic of C hina (PR C hina). H ow ever,
external dem and for plastic products continued to
rem ain strong during the year. The top tw o export
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 48
49
The Malaysian Economy in 2005
destinations for M alaysian m ade plastics w ere Europe
and Japan. A m ong the resource-based industries,
exports of rubber products continued to expand by a
double-digit rate in 2005, driven largely by the strong
global dem and for rubber gloves. M eanw hile, exports
of other resource-based products such as petroleum
products, food, beverages and tobacco continued to
expand during the year. In the case of m etal products,
after experiencing a strong expansion in 2004
(43.6% ), grow th slow ed dow n to 6.3% , due to global
oversupply of steel arising from aggressive capacity
expansion by C hinese steel m illers w hich led to low er
prices. O verall, both increases in volum e (8.8% ) and
unit value (1.2% ) resulted in the higher export
proceeds from the m anufacturing sector in 2005.
The primary commodities sector continued to
rem ain an im portant source of foreign exchange
earnings in the M alaysian trade account w ith its share
to total gross exports rising further during the year to
16.8% (2004: 16.1% ). C om m odity exports grew by
16% (2004: 21.8% ), reflecting the strong grow th in
exports of energy products, w hile agriculture exports
continued to grow at a m oderate rate. The grow th in
com m odity exports w as largely driven by higher
export prices (13.1% ), and further supported by an
increase in volum e (4.3% ).
Mineral exports grew strongly for the third consecutive
year, rising by 27.1% to RM 52.3 billion (2004: +38.2%
to RM 41.2 billion). Exports of crude oil and condensates
rose significantly by 33.7% to RM 28.5 billion, driven
entirely by the m arked increase in crude oil prices, w hich
rose by 37% to an average of U SD 55.93 per barrel for
2005 (2004: U SD 40.81). H ow ever, export volum e
declined by 2% in line w ith the low er output of crude
oil for the year. LN G export perform ance w as also
favourable, rising by 21.7% to RM 20.8 billion, due to
both higher prices (15% ) as w ell as volum e (5.9% ).
Export receipts from agriculture rose at a m ore
m oderate pace of 3.4% to RM 37.4 billion in 2005.
D espite the higher export volum e of palm oil
(10.9% ), earnings from palm oil fell by 5.3% during
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Export Value
1
Volum e and prices are estim ates based on Bank N egara M alaysia's
survey of selected com panies.
Source : D epartm ent of Statistics, M alaysia
Bank N egara M alaysia
Export Volum e
1
Export Prices
1
Graph 1.38
Export Performance of the Manufacturing Sector
A nnual C hange (% )
2004 2005
-5
0
5
10
15
20
25
30
Graph 1.39
Exports of Manufactured Goods by Destination
2005
2000
0 5 10 15 20 25
% share
U nited States
Source : D epartm ent of Statistics, M alaysia
Singapore
Japan
People's Republic of C hina,
H ong Kong C hina,Korea &
C hinese Taipei
A SEA N excl. Singapore
European U nion
O thers
Table 1.18
External Trade
2004 2005p
RM billion
Gross exports (f.o.b) 480.7 533.8
A nnual change (% ) 20.8 11.0
A nnual change (% )
Volum e
1
25.1 8.0
Prices
1
0.7 3.2
Gross imports (c.i.f) 400.1 434.0
A nnual change (% ) 26.4 8.5
A nnual change (% )
Volum e
1
27.6 3.5
Prices
1
2.7 4.9
Trade balance 80.7 99.8
1
Volum e and prices for 2005 are estim ates.
p Prelim inary
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 49
50
the year to RM 19 billion due entirely to low er prices
(-14.6% to RM 1,456 per tonne from RM 1,706 per
tonne in 2004). Prices consolidated during the year
am idst the increase in global production and stocks
of crude palm oil (C PO ), coupled w ith the increase in
harvests of soybean, w hich is palm oils closest
substitute in the global edible oil m arket.
N evertheless, offtake by m ajor buyers of M alaysian
palm oil, nam ely the European U nion (EU ), Pakistan
and PR C hina w ith a com bined share of alm ost 46%
of total palm oil exports, increased by 14.7% ,
10.8% and 2% respectively. Rubber exports
continued to perform favourably, rising by 11.3% to
RM 5.8 billion (2004: RM 5.2 billion) driven by both
higher prices (9% ) and volum e (2.1% ). External
dem and for rubber rem ained strong, led by PR
C hina, w hich increased its purchase by 33.7% to
386,058 tonnes (2004: 288,732 tonnes). The sharp
upw ard trend in dem and has enabled PR C hina to
becom e the largest purchaser of M alaysian rubber,
surpassing the EU (2005: 319,612 tonnes) for the
first tim e in 2005.
Gross imports increased by 8.5% (2004: 26.4% ),
reflecting m ainly im ports of inputs for m anufactured
exports as w ell as higher dem and for consum er and
investm ent goods. Im port prices increased by 4.9% ,
attributed to higher prices across m ost goods,
particularly, m anufactured goods, crude m aterials,
m ineral fuels as w ell as chem icals.
Im ports of intermediate goods, w hich accounted for
71% of im ports, grew by 7.2% , due m ainly to dem and
for electrical and electronics, and resource-based
products, particularly from the U S and regional
countries. Increased sourcing of interm ediate inputs
from PR C hina, Singapore and Thailand w as
underpinned by the m anufacturing supply chain as w ell
as extensive production netw ork and linkages in the
region. These im ports com prised m ainly com puter
com ponents and m achine parts, and industrial supplies
such as m etals and chem icals. Interm ediate im ports
relating to the m anufacture of goods for the dom estic
m arket also expanded. C onsistent w ith the strong
perform ance of the m otor assem bly industry in line
w ith higher dem and for passenger cars, im ports of
parts and accessories of transport equipm ent recorded
a strong grow th. In tandem w ith higher oil prices,
im ports of fuel and lubricants grew strongly.
Reflecting the further expansion in private investm ent,
im ports of capital goods increased by 9.5% . C apital
im ports excluding lum py item s grew by 9.3% . The
im petus for grow th cam e from capacity expansion and
upgrading for new technologies. C apital im ports w ere
channelled m ainly into the m anufacturing and services
sectors. The higher level of business activity and
investm ent to im prove the quality and efficiency of the
infrastructure in the services industry led to the increase in
im ports of office equipm ent and generators, turbines and
electric m otors for pow er generation. Im ports of industrial
m achinery and equipm ent in the m anufacturing sector
rem ained strong. C ontinued capacity expansion in the
m anufacturing sector occurred in areas such as higher-
end electrical and electronics products, m etals and
plastics. N ew technologies and products as w ell as the
extension of netw ork infrastructure underpinned the
grow th in im ports of telecom m unication equipm ent.
G row ing intra-regional trade betw een A SEA N and N orth
A sia and firm external dem and for com m odity exports led
to higher im ports of ships to service these m arkets.
In line w ith higher disposable incom e, im ports of
consumption goods increased by 5.9% . Im port
grow th reflected dem and for food and beverages as
w ell as consum er goods particularly durable and non-
durable consum er goods, nam ely, sound and video
reproducing equipm ent, household electrical goods,
jew ellery and m edicine. The share of consum ption
goods im ports to total im ports rem ained low ,
accounting for 5.7% of total im ports.
C onsonant w ith increasing intra-regional trade, im ports
for re-exports expanded by 26.9% . These im ports
w ere m ainly electrical and electronic products,
telecom m unication equipm ent and iron and steel
products w hich w ere packed, labeled and assem bled in
the free com m ercial zones at m ajor ports and airports.
These im ports w ere largely re-exported to Singapore,
Thailand, U S, PR C hina and H ong Kong C hina.
M anufactured Exports
Source : D epartm ent of Statistics, M alaysia
Electronics N on-electronics
Graph 1.40
Export Performance of Electronics and
Non-electronics Industries
A nnual C hange (% )
0
10
20
30
40
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2004 2005
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 50
51
The Malaysian Economy in 2005
Table 1.19
Gross Imports by End Use
2005p
RM A nnual
m illion change (% )
% share
Capital goods 60,734 9.5 14.0
C apital goods (except transport equipm ent) 53,939 10.0 12.4
Industrial machinery and equipment 14,419 9.1 3.3
Office equipment 11,291 23.5 2.6
Telecommunication equipment 6,999 0.6 1.6
Transport equipm ent 6,795 5.3 1.6
Intermediate goods 308,335 7.2 71.0
Food and beverages, m ainly for industry 8,352 -5.6 1.9
Industrial supplies, n.e.s. 96,599 6.0 22.3
Metals & metal products 31,870 15.6 7.3
Chemicals 11,667 9.6 2.7
Fuels and lubricants 27,492 42.3 6.3
Parts and accessories of capital goods
(except transport equipm ent) 163,660 2.7 37.7
Electronics 105,710 2.7 24.4
Parts and accessories of telecommunication equipment 7,249 -2.5 1.7
Parts and accessories of transport equipm ent 12,232 34.8 2.8
Consumption goods 24,600 5.9 5.7
Food and beverages, m ainly for household consum ption 9,280 4.0 2.1
Transport equipm ent, non-industrial 318 -4.9 0.1
C onsum er goods, n.e.s. 15,002 7.4 3.5
Consumer durables 3,514 12.3 0.8
Consumer semi-durables 4,671 0.4 1.1
Consumer non-durables 6,817 10.2 1.6
Dual use goods 11,308 21.5 2.6
M otor spirit 6,424 35.4 1.5
Passenger m otor cars 4,884 7.0 1.1
Others 7,171 0.8 1.7
Re-exports 21,862 26.9 5.0
Gross Imports 434,010 8.5 100.0
N ote: N um bers m ay not necessarily add up due to rounding.
n.e.s.N ot elsew here specified.
p Prelim inary
Source: D epartm ent of Statistics, M alaysia
M alaysias total external trade expanded by 9.9% to
RM 967.8 billion in 2005. The share of M alaysias trade
w ith the m ajor trading partners, nam ely the U S,
Singapore, Japan and the EU declined slightly and
accounted for 53.8% of total trade. H ow ever, trade w ith
regional countries (excluding Japan) grew , and accounted
for 44.4% of M alaysias exports and 49% of im ports.
Trade links w ith A ustralia and India strengthened, driven
m ainly by higher dem and for electrical and electronics
and petroleum -related products.
Exports to the US, M alaysias largest trading partner, grew
by 16.5% to account for an increased share of 19.7% of
total exports. The im petus to the export grow th stem m ed
from higher dem and induced by the replacem ent cycle for
w ireless com puters and com puter-related item s. Exports of
optical and m edical instrum ents and resource-based
products, nam ely w ood, rubber and chem ical products,
strengthened further. The US rem ained the second largest
source of im ports for M alaysia. Approxim ately 80% of
im ports w ere interm ediate inputs for the electrical and
electronics industry. As exports to the US increased w hile
im ports declined, the bilateral trade surplus w idened to
RM 49.1 billion (2004: RM 32.3 billion).
Singapore rem ained the second m ost im portant
trading partner w ith a share of 13.9% of total
trade (2004: 13.2% ). Electrical and electronic
products continued to be the largest export
receipts, accounting for 57.8% of total exports to
Singapore. O ther export item s w hich recorded
strong grow th include crude petroleum and
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 51
52
resource-based products, nam ely petroleum ,
chem ical, iron and steel products. O n the im ports
side, Singapore w as the third largest source for
M alaysia w ith im ports com prising m ainly electrical
and office m achinery, chem ical products as w ell as
refined petroleum products.
D espite a decline in the share of trade to 11.7%
(2004: 12.7% ), Japan continued to be the third
largest trading partner of M alaysia. The trade balance
w ith Japan, w hich has been in Japans favour,
im proved to register a sm aller deficit of RM 13.1 billion
as im ports declined w hile exports continued to grow .
Export grow th of 2.8% w as underpinned by increased
export receipts from LN G , m anufactures of plastics and
m etals. Im ports declined by 1.2% , reflecting low er
im ports of transport equipm ent, optical, m edical and
surgical instrum ents. Japan rem ained the principal
source of im ports for M alaysia, accounting for 14.5%
(2004: 15.9% ) of total im ports, although its share of
im ports has been declining as M alaysia diversifies its
trade and intensifies its trading link w ith other regional
countries.
The grow th in trade w ith countries in the EU
m oderated to 4.4% in 2005, reflecting the
slow dow n in econom ic activity in the EU . A trade
surplus of RM 12.1 billion (2004: RM 12.4 billion) w as
recorded, attributed m ainly to trade surplus w ith the
N etherlands (RM 14.1 billion), U K (RM 2.9 billion),
France (RM 1.3 billion) and Spain (RM 1.2 billion)
w hile trade deficits w ere recorded in trade w ith
G erm any and Italy of RM 8 billion and RM 2 billion
respectively. W ithin the group, G erm any, the
N etherlands and the U K rem ained the leading
trading partners. Exports to the EU com prised m ainly
integrated circuits and furniture w hile im ports w ere
m ainly iron and steel products, passenger cars and
electrical m achinery.
Trade w ith econom ies in North East Asia (excluding
Japan), w hich accounted for 21.2% of total trade,
Table 1.20
Direction of External Trade
2005p
Exports Im ports Trade balance
RM m illion % share RM m illion % share RM m illion
ASEAN countries 139,208 26.1 106,976 24.6 32,232
Singapore 83,333 15.6 50,828 11.7 32,505
Thailand 28,723 5.4 22,889 5.3 5,834
Indonesia 12,580 2.4 16,566 3.8 -3,986
Philippines 7,476 1.4 12,192 2.8 -4,716
O ther A SEA N countries 7,096 1.3 4,501 1.0 2,595
Selected North East Asia countries 99,184 18.6 106,254 24.5 -7,070
The Peoples Republic of C hina 35,221 6.6 49,880 11.5 -14,659
H ong Kong C hina 31,205 5.8 10,797 2.5 20,409
C hinese Taipei 14,813 2.8 23,974 5.5 -9,160
Korea 17,945 3.4 21,604 5.0 -3,659
European Union (EU) 62,629 11.7 50,512 11.6 12,117
U nited Kingdom 9,470 1.8 6,522 1.5 2,948
G erm any 11,259 2.1 19,265 4.4 -8,007
N etherlands 17,452 3.3 3,351 0.8 14,101
O ther EU countries 24,449 4.6 21,374 4.9 3,075
U nited States 105,033 19.7 55,918 12.9 49,115
Japan 49,918 9.4 62,982 14.5 -13,064
India 14,972 2.8 4,164 1.0 10,808
A ustralia 18,042 3.4 8,171 1.9 9,872
Rest of the w orld 44,801 8.4 39,033 9.0 5,769
Total 533,788 100.0 434,010 100.0 99,778
N ote: N um bers m ay not necessarily add up due to rounding.
p Prelim inary
Source: D epartm ent of Statistics, M alaysia
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 52
53
The Malaysian Economy in 2005
expanded by 11% . Increased sourcing of cheaper
inputs caused im port grow th from these countries to
continue to outpace exports. C onsequently, the
trade balance recorded a deficit of RM 7.1 billion in
2005. PR C hina w as M alaysias fourth m ajor source
of im ports, w ith im ports com prising m ainly
interm ediate com ponents such as integrated circuits,
m achinery, appliances and parts, chem ical and m etal
products. Exports to PR C hina w hich recorded
grow th w ere electronic and electrical products, iron
and steel and rubber products. Im ports from Korea
w as underpinned by im ports of integrated circuits,
office m achine parts and passenger cars w hile
exports w ere largely supported by LN G , com puter
and com ponents and chem ical products.
Increasing intra-regional trade and better econom ic
perform ance of ASEAN countries resulted in
M alaysias trade w ith A SEA N countries (excluding
Singapore) expanding by 12.3% in 2005. Exports to
A SEA N w ere supported m ainly by exports of electrical
and electronics and resource-based products such as
chem icals, iron and steel as w ell as plastic products.
Im ports from this region com prised m ainly electrical
and electronic products, chem ical products and
m anufactures of m etal.
The services account deficit w idened to RM 10.2
billion or 2.2% of G N P (2004: -RM 8.8 billion or
2.1% of G N P). H igher dem and for im ported
services as the econom y m oved up the production
value chain, led to a higher net paym ent of RM 12.3
billion (2004: -RM 9.7 billion) in the other services
account. The outflow s w ere attributable m ainly to
higher paym ents for royalties and license fees,
construction services, and other business services.
Royalties and license fee paym ents continued to
increase, reflecting acquisition of intellectual
property rights for design and developm ent of new
products by the m anufacturing sector, particularly in
the E& E industry, and services sector. M ore than
70% of paym ents for royalties and license fees w ere
m ade to the U K, U S and Japan. N et paym ents for
Graph 1.41
Direction of Exports (% share): 1995 Direction of Exports (% share): 2005
1
A SEA N excluding Singapore
2
H ong Kong C hina, Korea and C hinese Taipei
1
A SEA N excluding Singapore
2
H ong Kong C hina, Korea and C hinese Taipei
Singapore
20.3%
Singapore
15.6%
Japan
12.7%
Japan
9.4%
People's Republic
of C hina
2.7%
People's Republic
of C hina
6.6%
U nited States
20.7%
U nited States
19.7%
European U nion
(EU )
14.2%
European U nion
(EU )
11.7%
Rest of the w orld
11.2%
Rest of the w orld
14.5%
N IEs
2
11.3%
N IEs
2
12.0%
A SEA N
1
6.9%
A SEA N
1
10.5%
Table 1.21
Services and Income Accounts
2004 2005e
RM billion
N et + N et
Services Account -8.8 72.2 82.5 -10.2
% of GNP -2.1 -2.2
Transportation -17.8 16.2 31.9 -15.7
Travel 19.4 32.4 14.2 18.1
O ther services -9.7 23.3 35.6 -12.3
G overnm ent transactions n.i.e. -0.7 0.4 0.8 -0.4
Income Account -24.5 20.5 41.9 -21.5
% of GNP -5.8 -4.5
C om pensation of em ployees -1.1 4.2 4.7 -0.5
Investm ent incom e -23.4 16.2 37.2 -21.0
N ote: N um bers m ay not necessarily add up due to rounding.
n.i.e. N ot included elsew here.
e Estim ate
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia.
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 53
54
construction services increased, despite higher
earnings from construction projects abroad, due
m ainly to higher im ported services for pow er as w ell
as oil and gas exploration projects. The large
outflow s for other business servicesreflected
m ainly paym ents for professional services as w ell as
operational leases for ships, tugs and aircrafts.
M eanw hile, com puter and inform ation services
receipts im proved, underpinned by the expansion in
business process outsourcing and provision of group
netw ork support services. A bout half of these
earnings w ere from Singapore, the U K and U S.
D espite a m arginally sm aller net inflow , the travel
account rem ained the largest contributor to services
receipts, accounting for 44.8% of gross services
receipts in 2005. Tourist arrivals in M alaysia grew by
4.4% to 16.4 m illion visitors (2004: 15.7 m illion),
w ith gross foreign exchange earnings am ounting to
RM 31 billion. Visitors from Singapore, Thailand and
Indonesia accounted for 76.1% of tourist arrivals.
W hile visitors from PR C hina and H ong Kong C hina
declined, the grow th in tourist arrivals w as
supported by tourists from W est A sia, Korea, India,
A ustralia and N ew Zealand as w ell as long-haul
tourists from the U S and U K. M alaysia has benefited
from the expansion in regional travel, particularly
from countries such as Vietnam , Thailand and
Indonesia, as w ell as various strategies to prom ote
tourism products including hosting of m eetings,
international conventions and events (M IC E) such as
Form ula O ne Petronas M alaysia G rand Prix and
M alaysia M ega Sale C arnival.
O n the paym ents side, higher incom e and increased
business activities overseas led to travel outflow s
increasing by 21.1% to RM 14.2 billion (2004: RM 11.8
billion). These outflow s w ere attributable to the higher
num ber of M alaysians traveling as w ell as higher
paym ents for education abroad. Paym ents for travel to
border tow ns increased by 24.2% to RM 3 billion.
Education outflow s increased by 16.5% due m ainly to an
increase in the num ber of M alaysian students studying
abroad, particularly, in A ustralia, the U S and U K.
The transportation account recorded a sm aller deficit of
RM 15.7 billion (2004: -RM 17.8 billion), as the increase in
receipts by m ajor dom estic shipping com panies and airlines
1998 1999 2000 2001 2002 2003 2004 2005e
e Estim ate
Source: M alaysia Tourism Prom otion Board and D epartm ent of Statistics, M alaysia
Tourist arrivals Tourism receipts
Graph 1.42
Tourist Arrivals and Tourism Receipts
Tourist arrivals
in m illion
Receipts in
RM m illion
0
2
4
6
8
10
12
14
16
18
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Graph 1.43
2005: Components of Gross Receipts in
the Services Account (% share)
Travel
44.8%
O ther services
32.2%
G overnm ent
transactions n.i.e.
0.6%
Transportation
22.4%
Graph 1.44
2005: Components of Gross Payments in
the Services Account (% share)
Transportation
38.7%
G overnm ent
transactions n.i.e.
0.9%
O ther services
43.1%
Travel
17.3%
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 54
55
The Malaysian Economy in 2005
Higher returns from larger
external reserve holdings
together with sustained profits
and dividends accrued to
Malaysian companies from their
investment abroad contributed
to an improvement in income
account.
outpaced the increase in paym ents abroad. G ross receipts
w ere supported by earnings from shipm ents of petroleum ,
LNG and carriage of cargo follow ing the expansion in intra-
regional trade betw een North Asia and ASEAN, as w ell as
higher freight rates. G ross outflow s reflected higher freight
charges as w ell as increased volum e of trade.
The income account recorded an im provem ent, w ith
the deficit narrow ing to RM 21.5 billion or 4.5% of
G N P (2004: -RM 24.5 billion or 5.8% of G N P). The
sm aller deficit reflected m ainly higher returns from
larger external reserve holdings of Bank N egara
M alaysia. M eanw hile, the profits and dividends
accruing to M alaysian com panies from their investm ent
abroad w ere sustained at RM 4.1 billion. The bulk of
the receipts w ere from the oil and gas, utilities and
m anufacturing sectors.
The profits and dividends accruing to foreign investors
in M alaysia rem ained large, in line w ith the expansion in
exports of electrical and electronics industry and the oil
and gas sector. N evertheless, a substantial portion of
these profits and dividends w as retained in M alaysia for
reinvestm ent, and credited as inflow s of foreign direct
investm ent in the financial account of the balance of
paym ents. A profile of M alaysias incom e account from
1999 to Septem ber 2005 is published under the Special
Feature in the Bank N egara M alaysias Fourth Q uarter
2005 Q uarterly Bulletin.
In line w ith the continued efforts by the G overnm ent
to reduce illegal foreign w orkers in M alaysia, a total of
398,758 illegal w orkers returned to their hom e
countries during the A m nesty Program m e from 29
O ctober 2004 to end-February 2005. Reflecting the
one-tim e lum p sum repatriation by these w orkers
returning hom e under this Program m e, the current
transfers account recorded a larger net outflow of
RM 17 billion (2004: -RM 14.6 billion). A bout 58% of
the registered foreign w orkers in M alaysia w ere
em ployed in the m anufacturing and agriculture sectors.
Financial Account
In 2005, the financial account recorded a net outflow
of RM 42 billion (2004: +RM 15.1 billion), attributed
m ainly to the unw inding of speculative short-term
positions in the fourth quarter, larger repaym ent of
external loans by the official sector and higher
extension of trade credits by M alaysian exporters.
Reflecting the increased interests by M alaysian
com panies to diversify abroad, outflow s for overseas
investm ent also increased. M eanw hile, foreign direct
investm ent w as sustained at a high level.
O n a gross basis, foreign direct investment (FDI)
increased to RM 25 billion (2004: RM 23.5 billion), or
5.3% of G N P, w ith broad-based inflow s across the
m ajor sectors such as the oil and gas, services and
m anufacturing sectors. O f significance, there w as a
m arked increase in FD I from the m ajor investing
econom ies, nam ely the U S, H ong Kong C hina and
G erm any. The bulk of FD I continued to be in the form of
reinvested earnings, reflecting continued expansion and
diversification of operations by existing M N C s,
particularly in the m anufacturing and oil and gas
sectors, am idst favourable investm ent conditions in
M alaysia. A fter taking into account the adjustm ents for
higher outflow s due largely to loan repaym ents to
parent com panies abroad, net FD I recorded an inflow of
RM 15.6 billion (2004: RM 17.6 billion) or 3.3% of G N P.
FD I into the oil and gas sector increased significantly,
particularly in the upstream activities, encouraged by
rising oil prices and greater global dem and for crude oil
Table 1.22
Balance of Payments: Financial Account
2004 2005e
RM billion
Financial Account 15.1 -42.0
Direct Investment 9.7 2.7
In M alaysia 17.6 15.6
A broad -7.8 -12.9
Portfolio Investment 33.8 -11.9
Other Investment -28.5 -32.8
O fficial sector -1.1 -11.1
of which:
Federal G overnm ent (net) 0.1 -3.5
G ross borrow ing 1.1 0.7
Repaym ent -1.0 -4.2
N FPEs (net) -1.3 -7.6
G ross borrow ing 11.4 6.3
Repaym ent -12.7 -13.9
Private sector -27.3 -21.7
N ote: N um bers m ay not necessarily add up due to rounding.
e Estim ate
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 55
56
during the year. These activities w ere m ostly undertaken
by the national oil and gas com pany in joint venture
w ith its international partners, for deepw ater and ultra-
deepw ater oil explorations, particularly in offshore East
M alaysia, as w ell as for the extraction operations from
existing and new oil fields.
In the services sector, foreign investm ents w ere received
m ainly in the finance, insurance, real estate and business
services sub-sector, follow ed by the w holesale and retail
trade, hotels and restaurants sub-sector and the
transportation and com m unication sub-sector. Inflow s
into the finance, insurance, real estate and business
services sub-sector reflected m ainly investm ents received
by investm ent holding com panies, w hile one of the three
foreign banks w hich w ere aw arded licenses for Islam ic
banking in 2004 com m enced its operations during the
year. O f significance, M alaysia m aintained the attraction
for M N C s to locate their shared services and outsourcing
activities, thus, encouraging higher value-added activity
and establishing linkages across the different segm ents of
the services sector. This w as reflected in the A.T. Kearney
2005 Offshore Location Attractiveness Index, w hich
ranked M alaysia as the third m ost attractive investm ent
destination for Shared Services & O utsourcing (SSO ) for
the second consecutive year, citing favourable factors
such as w orld-class infrastructure, attractive fiscal
incentive packages and availability of skilled labour.
D uring the year, there w as an increase of 169
international and regional facilities, of w hich 19 w ere
operational headquarters (O H Q s), 132 regional and
representative offices, 15 international procurem ent
centres (IPC s) and three regional distribution centres
(RD C s). Investm ents in the w holesale and retail trade,
hotels and restaurants sub-sector rem ained firm ,
supported by strong dom estic consum ption in trade and
tourism -related services. M eanw hile, investm ents in the
transportation and com m unication sub-sector w ere
m ainly for the expansion of activities in the courier as w ell
as air and ocean freight services.
The m anufacturing sector continued to be a m ajor
recipient of FD I. A bout one-half of the investm ents
w ere concentrated in the electrical and electronic
industry, prim arily for plant expansion as w ell as
upgrading of m achinery and equipm ent, to enlarge
capacity as w ell as for production of higher-end
products. Significant investm ents w ere also
channelled into the dow nstream petroleum refining
and petroleum -related product industry, in line w ith
the higher investm ent in the upstream oil and gas
activities. M eanw hile, investm ents in the other
m anufacturing industries w ere varied, ranging from
industrial chem icals and other chem ical-related
products, plastic-based products to the
m anufacturing of fabricated m etal products and
m achinery and equipm ent.
Direct investment abroad by M alaysians increased to
RM 12.9 billion in 2005 (2004: -RM 7.8 billion),
reflecting increased interests by M alaysian com panies
to acquire foreign interests as w ell as to exploit
opportunities to diversify their operations abroad. The
top destination for the investm ent w as the A SEA N
countries, w hich accounted for about half of total
direct investm ent abroad. O ther m ajor destinations
include PR C hina, U S and H ong Kong C hina although
som e of M alaysias investm ents w ere channelled
through international offshore financial centres before
re-directed to its final destination. The scope of
investm ent has becom e increasingly broad-based,
ranging from the oil and gas and m anufacturing
sectors, to the services sector. O n a sectoral basis, a
large share of overseas investm ents w as effected by
com panies in the services sector, in particular, the
transport and com m unication sub-sector as w ell as the
financial services sub-sector. M ost of these investm ents
w ere undertaken through equity acquisitions by several
large M alaysian com panies, including the takeover of
an Indonesian m obile telephone operator, as w ell as
the acquisition of a shipping com pany in Singapore. In
addition to the investm ents that w ere carried out by
large corporations, m any sm all and m edium -sized
M alaysian com panies also invested in low -cost
econom ies, taking advantage of cheap labour,
availability of raw m aterials and new m arket base.
In the oil and gas sector, the national oil com pany
continues to forge joint venture partnership w ith several
foreign oil com panies for exploration and extraction,
lending technical expertise and providing w orking
The financial account recorded
a net outflow, attributed
mainly to the unwinding of
speculative portfolio
investment, larger repayment
of external loans by the official
sector and higher extension of
trade credits. Overseas
investment by Malaysians was
also higher, while FDI was
sustained at a high level.
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 56
57
The Malaysian Economy in 2005
capital for investm ent. M eanw hile, overseas investm ents
in the m anufacturing sector w ere led by com panies in
the sem iconductor and other electronic com ponent, and
ship building- and repairing-related industries. A part
from the provision of equity capital financed m ainly
from internal funds, higher overseas investm ents w ere
also effected through higher loans extension by the
parent com panies in M alaysia to their subsidiaries
abroad. These com panies sought to expand production
facilities in new m arkets for entry into the new and
often fast-grow ing m arkets. Several big com panies
from furniture and w ood-related products, as w ell as
basic m etal industries in M alaysia have also invested
abroad to achieve cost effective production w hile at the
sam e tim e, enhanced the prospects for new export
outlet for business expansion. M eanw hile, investm ents
abroad by construction com panies continued to be
significant follow ing their earlier success in bidding and
on-going w ork of several large infrastructure, roads and
highw ay projects abroad.
M alaysias investm ents abroad continued to yield
positive results. Reflecting the success of their
operations abroad, the net profits and dividends
accruing to M alaysian com panies investing abroad,
particularly from the oil and gas sector and financial
services sub-sector, w as sustained at RM 4.1 billion in
2005 (2004: RM 4.3 billion).
In 2005, portfolio investment registered a net outflow
of RM 11.9 billion (2004: +RM 33.8 billion). In the first
half-year, portfolio investm ent recorded a net inflow of
RM 8.1 billion, reflecting m ainly foreign interest in short-
term m oney m arket papers, debt securities as w ell as
equities. The strong interest observed in M alaysias
capital m arket since last year w as partly associated w ith
the periodic anticipation of exchange rate realignm ents
in the region. H ow ever, the flow s reversed in the second
half of the year, recording a net outflow of RM 20
billion. The outflow s, w hich com m enced in Septem ber
and continued into O ctober and N ovem ber, arose
m ainly from the liquidation of short-term m oney m arket
papers and debt securities, and to a lesser degree,
equity securities. These outflow s subsided in D ecem ber.
The other investment recorded a higher net outflow
of RM 32.8 billion (2004: -RM 28.5 billion), reflecting
m ainly larger repaym ent of external loans by the official
sector w hile net outflow s by the private sector declined.
The official sector recorded a net repaym ent position
for the third consecutive year, am ounting to RM 11.1
billion (2004: -RM 1.1 billion), in line w ith M alaysias
prudent external debt m anagem ent strategy and the
G overnm ents com m itm ent tow ards fiscal consolidation.
M eanw hile, other investm ent by the private sector,
w hich com prises m ainly borrow ing and lending,
placem ents and w ithdraw als of deposits by the banking
sector as w ell as non-bank private sector transactions
w ith unrelated counterparties, recorded a low er net
outflow of RM 21.7 billion (2004: -RM 27.3 billion). The
im provem ent w as due largely to a reversal in the
banking sector position registering a net inflow during
the year, arising m ainly from the w ithdraw al of deposits
placed abroad. These inflow s had partially offset the
higher outflow s by the non-bank private sector, due
m ainly to higher trade credits extended by M alaysian
exporters, as w ell as larger repaym ents of external loans
by the private sector.
External Debt
M alaysias external debt m anagem ent strategy
continues to focus on providing a stable foundation for
a sustainable debt environm ent over the longer term .
The countrys m anageable debt situation is achieved
through prudent debt m anagem ent practices supported
by a w ell-functioning debt reporting and m onitoring
system . The prudential safeguards include efforts to
m inim ise risk exposure against global interest rate
shocks, adverse exchange rate m ovem ents and shift in
investor sentim ent. M eanw hile, the debt m onitoring
system enables the authorities to m onitor the overall
debt level, the structure of the debt as w ell as servicing
obligations of both the public and private sectors.
External debt position
improved, reflecting
continued net repayment by
the public sector. The share of
short-term debt to total debt
remained low.
In an effort to im prove the com pilation of the external
debt data for better risk assessm ent and to be in line w ith
the international standards and practices, the Bank
initiated the com pilation of external debt data w ith the
offshore financial entities in Labuan International
O ffshore Financial C entre (Labuan IO FC ) being treated as
residents. U nder this approach, data on debt transactions
and exposure of the offshore financial entities in Labuan
IO FC vis--vis the rest of the w orld are included as part of
M alaysias external debt. M eanw hile, debt transactions
and exposure of residents w ith offshore financial entities
in Labuan IO FC , w hich w ere currently included in the
nations external debt, are excluded. The aggregated data
of offshore financial entities in Labuan IO FC w as obtained
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 57
58
from the Labuan O ffshore Financial Services A uthority
(LO FSA ). The external debt position under this new
definition is provided in the Box A rticle titled
C om pilation of M alaysias External D ebt: Treatm ent of
O ffshore Financial Entities in Labuan IO FC as Residents.
In the transition period, the official external debt data
published by Bank N egara M alaysia for 2005 and 2006
w ould continue to follow the existing definition of
treating offshore financial entities in Labuan IO FC as non-
residents. The Bank w ould sim ultaneously com pile the
external debt position under the new definition i.e.
treating offshore financial entities in Labuan IO FC as
residents for 2006, w ith the target of fully adopting and
publishing only the external debt position under the new
definition starting w ith reporting period of first quarter of
2007 for release in M ay 2007. Thus, the developm ent of
M alaysias external debt position in 2005 in this section
w as analysed and reported based on the data com piled
using existing definition i.e. treating offshore financial
entities in Labuan IO FC as non-residents.
In 2005, the total external debt outstanding declined by
2.4% to RM 195.9 billion (USD51.3 billion), due largely to
low er gross borrow ings w hile repaym ent increased. The
im provem ent in the external debt position w as also reflected
in the decline in ratios of external debt to G NP and to
exports of goods and services to 41.4% and 32.2%
respectively (2004: 47.2% and 36.8% respectively). The
ratio of short-term debt to international reserves w as stable
at 17.3% w hile both the overall debt service ratio (excluding
prepaym ent) and the share of short-term debt to total debt
rem ained low at 4.7% and 23.6% respectively.
The medium- and long-term external debt declined by
4.6% to RM 149.7 billion (USD39.2 billion) as at end of
2005 (2004: RM 156.8 billion), due m ainly to a significantly
larger net repaym ent of external loans of RM 11.1 billion
(2004: -RM 1 billion) by the public sector. The decline w as
also due partly to the exchange revaluation gain of RM 3.3
billion follow ing the appreciation of the ringgit against
m ajor currencies. M eanw hile, as the increase in gross
borrow ings outpaced a higher loan repaym ent during the
year, the private sector registered a larger net draw dow n
of RM 4.2 billion (2004: RM 2.9 billion).
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p
RM billion
%
Interest paym ent Repaym ent
D ebt service ratio (RH S)
Graph 1.45b
Debt Servicing
p Prelim inary
0
5
10
15
20
25
30
35
0
1
2
3
4
5
6
7
8
Graph 1.45a
Outstanding External Debt
RM billion %
Short-term
1
N FPEs Federal G overnm ent
Private Sector
D ebt/G N P (RH S)
1
Excludes currency and deposits held by non-residents w ith resident
banking institutions.
p Prelim inary
0
20
40
60
80
100
120
140
160
180
200
220
0
10
20
30
40
50
60
70
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p
Table 1.23
Outstanding External Debt
2004 2005p 2004 2005p
RM RM U SD U SD
m illion m illion m illion m illion
Total debt 200,586 195,865 52,786 51,310
M edium - and long-term 156,849 149,682 41,276 39,212
Short-term
1
43,737 46,183 11,510 12,098
As % of total debt 21.8 23.6 21.8 23.6
As % of net
international reserves 17.3 17.3 17.3 17.3
As % of GNP
Total debt 47.2 41.4
M edium - and long-term
debt 36.9 31.6
As % of exports of
goods and services
Total debt 36.8 32.2
M edium - and long-term
debt 28.8 24.6
Debt service ratio (%) 4.6 4.7
1
Excludes currency and deposits held by non-residents w ith resident banking
institutions.
p Prelim inary
Source: M inistry of Finance and Bank N egara M alaysia
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 58
59
The Malaysian Economy in 2005
The m edium - and long-term debt continued to be largely
denom inated in the U nited States dollar, accounting for
80.1% of total m edium - and long-term debt outstanding
as at end-2005. The share of yen-denom inated debt
declined m arginally to 11.9% (2004: 12.8% ) w hile the
euro-denom inated debt accounted for only 2.2% (2004:
5.2% ) due largely to the settlem ent of a euro-
denom inated bond by the Federal G overnm ent in the
fourth quarter. The rem aining 5.8% of the m edium - and
long-term external debt w as denom inated in other
international currencies, including the pound sterling,
Singapore dollar and H ong Kong dollar.
The public sector recorded its third consecutive year
of net external debt repaym ent in 2005, reflecting
low er gross borrow ings by both the Federal
G overnm ent and N FPEs w hile the repaym ent w as
higher follow ing the m aturity of several large
borrow ings and prepaym ent of som e external loans.
C onsequently, the outstanding external debt of the
public sector declined sharply by 11.1% to RM 86.2
billion (U SD 22.6 billion) as at end-2005 (2004: RM 96.9
billion) to account for a low er share of 44% (2004:
48.3% ) of total external debt.
In 2005, the Federal Government m aintained its
practice to source its funding requirem ents m ainly
from non-inflationary dom estic sources. For the
second consecutive year, no new m arket loan w as
raised from the international capital m arket. The
gross external borrow ings by the G overnm ent w ere
low er (RM 0.7 billion; 2004: RM 1.1 billion) w hile
repaym ents increased significantly to RM 4.2 billion
(2004: -RM 1 billion), reflecting m ainly the m aturity of
a Euro bond of RM 2.9 billion in N ovem ber 2005 and
som e scheduled principal repaym ents of syndicated
loans. The draw dow n of external loan w as attributed
entirely to project loans com m itted earlier from the
bilateral sources such as under the M iyazaw a
Initiative, as w ell as from m ultilateral sources, such as
the W orld Bank, Islam ic D evelopm ent Bank and A sian
D evelopm ent Bank. A ccordingly, the Federal
G overnm ent external debt declined further to RM 30
billion (U SD 7.9 billion) or 15.3% of total external
debt as at end-2005 (2004: RM 34.7 billion or 17.3%
of total external debt).
Reflecting M alaysias strong econom ic fundam entals,
the interest spread on M alaysias benchm ark securities
rem ained low in 2005 w hile M alaysias sovereign
ratings on long-term foreign currency obligations
w ere generally m aintained by the international rating
agencies. The spread on M alaysias G lobal Bond due
2011 over com parable U S Treasury Securities stood at
2001 2002 2003 2004 2005
G lobal Bond (2009)
G lobal Bond (2011)
Petronas Bond (2006)
Graph 1.46
Spread of Sovereign Bonds and Selected
NFPE Bond Over Comparable US Treasury Securities
Yield Spread
J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N
0
50
100
150
200
250
300
56 basis points at the end of 2005 w hile the spread
on the G lobal Bond due 2009 rem ained stable at 55
basis points at end-2005. O n 25 A pril 2005, Rating
and Investm ent Inform ation Inc. affirm ed M alaysias
foreign currency rating at A - and revised the rating
outlook from stable to positive. M oodys Investor
Services affirm ed M alaysias long-term foreign
currency rating at A 3 and m aintained a rating outlook
of stable on 28 A pril 2005. In a sim ilar m ove, on 25
M ay 2005, Standard & Poors affirm ed M alaysias
long-term foreign currency ratings at A - and
m aintained a rating outlook of stable. O n 18
N ovem ber 2005, Fitch affirm ed M alaysias long-term
foreign currency ratings at A - and m aintained a rating
outlook of stable.
In 2005, the NFPEs registered a m arkedly higher net
repaym ent of RM 7.6 billion (2004: -RM 1.1 billion),
reflecting m ainly a higher gross repaym ent of external
debt of RM 13.9 billion (2004: -RM 12.6 billion) due
partly to the m aturity of U S dollar-denom inated bonds
issued by com panies in the oil and gas and
m anufacturing sectors as w ell as prepaym ents of several
loans. In contrast, gross borrow ings w as significantly
low er at RM 6.3 billion (2004: RM 11.5 billion).
C onsequently, the outstanding external debt of N FPEs
declined to RM 56.2 billion (U SD 14.7 billion) or 28.7%
of total external debt as at end-2005 (2004: RM 62.2
billion or 31% of total external debt).
A s at end-2005, the private sector external debt
(including short-term debt) increased to RM 109.7 billion
or U SD 28.7 billion (2004: RM 103.7 billion), and
accounted for 56% of the total external debt. The
m edium - and long-term external debt recorded a larger
net borrow ing of RM 4.2 billion (2004: RM 2.9 billion) as
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 59
60
the increase in gross borrow ings outpaced a higher
repaym ent of loans during the year. The larger
draw dow n of external loans w as m ainly by com panies
in the services, plantation, m anufacturing and oil and
gas sectors. D espite a higher borrow ing, the overall risk
profile of the private sector m edium - and long-term
debt rem ained low as the bulk of these loans have a
natural hedge. M ost of these loans w ere used to finance
export-oriented activities and overseas investm ent w ith
foreign exchange earnings and incom e. Furtherm ore, a
large share of these loans w as sourced from the
offshore shareholders and parent or associate
com panies w ith m ore flexible term s and at
concessionary interest rates. M eanw hile, the bulk of the
repaym ents w as effected by com panies in the
plantation, services and m anufacturing sectors. Thus,
the private sector m edium - and long-term external debt
outstanding increased to RM 63.5 billion (U SD 16.6
billion) as at end-2005 (2004: RM 60 billion).
The outstanding short-term external debt (m aturity
of one year or less) rose by RM 2.4 billion to RM 46.2
billion (U SD 12.1 billion) in 2005, due entirely to an
increase in the short-term external borrow ing by the
banking sector, m ainly for hedging activities on trade-
related transactions and treasury activities. M eanw hile,
short-term debt by the non-bank private sector,
com prising m ainly term loans, revolving credits and
overdraft facilities, declined further to RM 7.3 billion in
2005 (2004: RM 8.4 billion).
Compilation of Malaysias External Debt: Treatment of Offshore Financial Entities
in Labuan IOFC as Residents
The Fifth Edition of the Balance of Paym ents M anual (BPM 5) of the International M onetary Fund
classifies offshore entities in an econom y as residents for com pilation of external data, including
external debt data. Sim ilarly, the External D ebt Statistics G uide for C om pilers and U sers
1
(2003), also
states that The residence of offshore enterprises including those engaged in the assembly of
components manufactured elsewhere, those engaged in trade and financial operations, and those
located in special zones is attributed to the economies in which they are located.A s such, the
debt liabilities of offshore entities that are ow ed to non-residents are to be included as part of an
econom ys external debt.
In the current definition of external debt in M alaysia, the offshore entities in Labuan International
O ffshore Financial C entre (Labuan IO FC ) are treated as non-residents for foreign exchange
adm inistration purposes. Thus, these entities are not subject to the foreign exchange adm inistration
rules applicable to residents, including statistical reporting to Bank N egara M alaysia. A s a result, w hile
the external debt data com piled and dissem inated by M alaysia include debt transactions and exposure
of residents w ith offshore entities in Labuan IO FC , they exclude debt transactions and exposure of the
offshore entities vis--vis the rest of the w orld.
A s part of our continuous efforts to im prove the com pilation of external debt data for better risk
assessm ent as w ell as in conform ity w ith international best practices, Bank N egara M alaysia, w ith the
assistance of the Labuan O ffshore Financial Services A uthority (LO FSA ) has com piled the new external
debt data of M alaysia, starting w ith position as at end-2004. This data includes borrow ings by the
offshore financial entities in Labuan IO FC from non-residents, w hile the borrow ings by residents from
these offshore financial entities are excluded. A com parison of the existing definition of external debt
and the new definition is given in D iagram 1.
Implication on Malaysias External Debt
(i) Comparison of newly defined external debt with existing definition for 2004 position
Table 1 provides a com parison of M alaysias external debt levels w ith offshore financial entities in
Labuan IO FC being treated as non-resident (existing definition) and as resident (new definition)
1
A guide jointly prepared by the Bank for International Settlem ents (BIS), C om m onw ealth Secretariat, Eurostat, International M onetary Fund (IM F), O rganisation for
Econom ic C o-operation and D evelopm ent (O EC D ), Paris C lub Secretariat, U nited N ations C onference on Trade and D evelopm ent (U N C TA D ) and W orld Bank.
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 60
61
The Malaysian Economy in 2005
New Definition: Coverage of External Debt with Offshore
Financial Entities in Labuan IOFC as Resident
The rest of
the w orld
Labuan
M alaysia
External D ebt = A + C
Diagram 1
Malaysia's External Debt Compilation
Existing Definition: Coverage of External Debt with Offshore
Financial Entities in Labuan IOFC as Non-resident
The rest of
the w orld
Labuan
M alaysia
External D ebt = A + B
A
B
C
A
B
C
respectively. The shift from the existing definition in com pilation of external debt to the new definition
in accordance w ith BPM 5 has resulted in som e changes in level and profile of external debt as follow s:
U nder the new definition, M alaysias total external debt as at end-2004 w as higher at
RM 209.9 billion (U SD 55.2 billion) or equivalent to 49.4% of G N P com pared w ith the existing
level of RM 200.6 billion (U SD 52.8 billion) or 47.2% of G N P.
The medium- and long-term external debt w as low er at RM 146.4 billion under the new
definition (RM 156.8 billion under existing definition) due largely to low er external debt of the
Federal G overnm ent follow ing the reclassification of several m arket loans sourced from offshore
financial entities in Labuan IO FC as part of dom estic borrow ings. Som e of these loans w ere
reflected instead in the m edium - and long-term external debt of the banking sector.
C onsequently, the share of public debt to total external debt w as low er at 41.1% com pared
w ith 48.3% under existing definition.
C orrespondingly, the share of the private sector debt (m edium - and long-term plus short-term debt)
to total external debt w as larger at 58.9% com pared w ith 51.7% under existing definition. W ithin
this sector, the external debt of the non-bank private sector w as low er at RM 54.8 billion (RM 67.7
billion under existing definition), follow ing the reclassifications of the external loans from the
offshore financial entities into dom estic borrow ings. Som e of these loans w ere reflected in the
external debt of the banking sector. A s a result, the share of the external debt of the non-bank
private sector to total debt declined to 26.1% from 33.7% .
M eanw hile, the external debt of the banking sector w as higher at RM 68.7 billion (RM 36 billion
under existing definition) w ith its share to total external debt increasing to 32.8% from 18% ,
reflecting m ainly short-term interbank borrow ings by offshore financial entities in Labuan IO FC from
financial institutions outside M alaysia arising from their investm ent and treasury operations. A s a
result, the total short-term external debt w as higher at RM 63.4 billion (RM 43.7 billion under
existing definition), accounting for a larger share of 30.2% of total external debt (21.8% under
existing definition).
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 61
62
(ii) Developments in 2005 based on new definition
A s at the end of 2005, M alaysias total external debt increased by RM 10.1 billion to RM 220 billion
(U SD 57.6 billion). N evertheless, the new ly defined external debt position accounted for 46.5% of G N P
at the end of 2005 com pared w ith 49.4% of G N P at the end of 2004.
The higher external debt level w as due to an increase in short-term debt to RM 69.4 billion (U SD 18.2
billion), reflecting m ainly the higher inter-bank borrow ings by offshore banks in Labuan IO FC arising
from their investm ent and treasury operations. A ccordingly, the ratio of short-term debt of the banking
sector to total debt also increased to 29.1% as at end-2005 com pared to 27.5% as at end-2004.
Including the short-term debt of the non-bank private sector, the overall ratio of short-term debt to
total external debt increased to 31.6% .
Table 1
Outstanding External Debt
O ffshore Financial Entities in
Labuan IO FC as
N on-Resident Resident
1
2004 2004 2005
(RM billion)
Total external debt (ED)
2
200.6 209.9 220.0
M edium - and long-term (M LTD ) 156.8 146.4 150.6
Federal Government 34.7 23.8 22.5
NFPEs 62.2 62.4 60.0
Private Sector 60.0 60.3 68.1
Bank 0.7 11.0 12.4
Non-Bank 59.3 49.2 55.6
Short-term (STD ) 43.7 63.4 69.4
Bank 35.3 57.7 64.0
Non-Bank 8.4 5.7 5.4
Memorandum items:
Private sector debt (M LTD + STD ) 103.7 123.5 136.9
Bank 36.0 68.7 76.4
Non-Bank 67.7 54.8 60.5
(percent)
ED /G N P 47.2 49.4 46.5
STD /ED 21.8 30.2 31.6
STD /Reserves 17.3 25.0 26.1
Public debt/ED 48.3 41.1 37.8
Private debt/ED 51.7 58.9 62.2
MLTD 29.9 28.7 30.9
STD 21.8 30.2 31.3
N on-Bank 33.7 26.1 27.5
MLTD 29.5 23.5 25.3
STD 4.2 2.6 2.2
Bank 18.0 32.8 34.7
MLTD 0.3 5.2 5.7
STD 17.6 27.5 29.1
1
The treatm ent of offshore financial entities in Labuan IO FC as residents is applicable only to the com pilation of the above external debt data by
the Bank. D ebt transactions and exposure by sector (public, banking and non-bank private sectors) w ith offshore financial entities in Labuan
IO FC w ill continue to be treated as external debt for other publications until the end of the interim period in m id-2007
2
Excludes currency and deposits held by non-residents w ith resident banking institutions
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 62
63
The Malaysian Economy in 2005
M eanw hile, the medium- and long-term external debt increased m arginally to RM 150.6 billion
(U SD 39.4 billion) as at end-2005, reflecting net repaym ent of loans by the public sector, com prising the
Federal G overnm ent and N FPEs, being offset by net borrow ing by the private sector. C onsequently, the
share of the public sector debt to total external debt declined to 37.8% w hile the share of the private
sector debt increased to 62.2% .
Risk Assessment of External Debt
Despite a higher total outstanding external debt, M alaysias external debt position continues to be w ithin the prudent
level of 46.5% of G NP in 2005. The higher short-term debt w as attributed entirely to borrow ings by offshore financial
entities in Labuan IO FC, particularly from their head offices and branches abroad, arising from their investm ent and
treasury operations. A large share of these borrow ings w as on lent to residents in M alaysia. Including the short-term
debt of the non-bank private sector, the overall ratio of short-term debt to international reserves and the share of short-
term debt to total debt at the end of 2005 rem ained low at 26.1% and 31.6% respectively.
The increase in m edium - and long-term external debt w as m oderate and reflects the increase in the private sector
external debt. The bulk of these loans have a natural hedge as they w ere used to finance export-oriented activities
and overseas investm ent w ith foreign exchange earnings and incom e. Furtherm ore, a large share of these loans w as
sourced from the offshore shareholders and parent or associate com panies w ith m ore flexible term s and at
concessionary interest rates.
Conclusion
The com pilation of M alaysias external debt under the new definition, w ith offshore financial entities in Labuan IO FC
being treated as residents, has facilitated a m ore accurate assessm ent of the external exposure, including credit, foreign
exchange and liquidity risks faced by the M alaysian econom y, especially in the light of the increasing trend of residents
and non-residents establishing offshore entities in Labuan IO FC to facilitate their financing and investm ent activities. In
addition, the shift tow ards the new definition underscores M alaysias com m itm ent to international standard and best
practices in external debt com pilation and dissem ination to facilitate international com parison and assessm ent.
International Reserves
The international reserves held by Bank N egara
M alaysia com prises holdings of foreign exchange and
gold, the IM F reserve position and holdings of Special
D raw ing Rights (SD R). For the year 2005 as a w hole,
net international reserves increased by RM 12.8 billion
to RM 266.3 billion (U SD 70.5 billion) as at 31
D ecem ber 2005. The net increase in the reserves in
2005 reflected the fundam entals of the econom y w ith
foreign exchange inflow s generated m ainly from
export earnings and foreign direct investm ent. The
reserves level am ounted to RM 272.7 billion or
equivalent to U SD 72.2 billion as at 28 February 2006.
The reserves position is adequate to finance 7.6
m onths of retained im ports and cover 6.7 tim es the
short-term external debt.
In the first half of 2005, the sustained repatriation
of export proceeds and foreign direct investm ent
w as reinforced by significant inflow s of portfolio
investm ent. The large inflow s of short-term funds
during the period w ere partly in anticipation of a
change in the exchange rate regim e. Follow ing the
Banks announcem ent of the change in the
exchange rate regim e to a m anaged float on 21 July
2005, reserves increased further, driven by
significant inflow s of short-term funds. The flow s
norm alised subsequently am idst an orderly price
discovery process. The decline in reserves, from
Septem ber to N ovem ber, reflected m ainly the
unw inding of the speculative short-term positions.
N evertheless, the outflow s of short-term funds
subsided by D ecem ber. The outflow s during this
period also reflected higher im port paym ents
associated w ith stronger dom estic dem and, larger
repaym ent of external loans by the official sector as
w ell as higher year-end repatriation of profits and
dividends by foreign corporations.
D uring the year, the cum ulative foreign exchange
revaluation loss am ounted to RM 15.5 billion (2004:
+RM 8 billion), follow ing the strengthening of ringgit
against the m ajor currencies.
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 63
64
In m anaging the reserves, Bank N egara M alaysia
continued to adopt a prudent approach to ensure
capital preservation and liquidity of reserves w hilst
optim ising returns. The reserves are held in the
form of foreign currency deposits and sovereign and
quasi-sovereign papers of high investm ent grade.
Reflecting M alaysias strong balance of paym ents
position, M alaysia w as included in the Financial
Transactions Plan of the IM F by m aking resources
available to m em ber countries that are facing short-term
balance of paym ents difficulties. N evertheless, the
reserve position with the IMF declined by RM 1,882
m illion in 2005, due to the repurchase of SD R300.3
m illion (RM 1,655.5 m illion) follow ing repaym ent to the
ringgit account by various m em ber countries under the
Financial Transactions Plan, w hile the exchange
revaluation loss am ounted to RM 226.5 m illion.
M alaysias holdings of reserves in the form of SDRs also
declined by RM 17 m illion. Exchange revaluation loss on
holdings of SD Rs am ounting to RM 66.8 m illion w as
partially offset by net receipt of rem uneration w orth
RM 49.8 m illion arising from M alaysias net creditor
position w ith the Fund.
The international reserves, held by the Bank rem ains
usable and unencum bered. There are no foreign
currency loans w ith em bedded options; and no
undraw n, unconditional credit lines provided by or
to other central banks, international organisations,
banks and other financial institutions. Bank N egara
M alaysia also does not engage in options in foreign
currencies w ith regard to the ringgit. Repo and
securities lending activities and financial derivative
assets are also insignificant.
Table 1.25
International Reserves for Selected Regional
Economies
Reserves
Reserves
Reserves
Reserves
as at
in months
as cover
as cover
Country
end-2005
of imports
of short-
of total
(USD
term
external
billion)
external
debt
1
debt
1
C hinese Taipei 253.3 16.7 4.0 3.1
H ong Kong C hina 124.3 5.0 0.4 0.3
Indonesia 34.1 7.2 3.5 0.2
Korea 210.4 9.7 3.1 1.1
Malaysia 70.5 7.8 5.8 1.4
Philippines 18.5 4.9 3.0 0.3
PR C hina 818.9 14.9 5.7 3.1
Singapore 116.6 7.0 0.6 0.5
Thailand 52.1 5.3 3.1 1.0
1
External debt data refers to am ount outstanding as at end-Septem ber 2005,
except for C hinese Taipei (end-June 2005) and M alaysia (end-2005).
Source:N ational authorities; A sian D evelopm ent Bank;
SD D S, International M onetary Fund
Net international reserves
increased by RM12.8 billion in
2005, reflecting the
fundamentals of the economy
with foreign exchange
inflows generated mainly
from export earnings and
foreign direct investment.
Table 1.24
Net International Reserves
A s at end- C hange
2003 2004 2005 2005
RM m illion
SD R holdings 685.0 765.3 748.3 -17.0
IM F reserve position 3,652.0 3,068.4 1,186.3 -1,882.0
G old and foreign
exchange 166,139.3 249,704.1 264,421.6 14,717.5
Gross International
Reserves 170,476.3 253,537.8 266,356.2 12,818.4
Less Bank N egara
M alaysia external
liabilities 23.8 24.5 22.5 -2.0
Net International
Reserves 170,452.5 253,513.3 266,333.7 12,820.4
USD million equivalent 44,855.9 66,714.0 70,483.3 3,769.3
M onths of retained
im ports 6.6 7.9 7.8
Reserves/Short-term
external debt (tim es) 5.1 5.8 5.8
Graph 1.47
Net International Reserves (end-month)
200
220
240
260
280
300
320
D J F M A M J J A S O N D
RM billion M onths/Tim es
N et international reserves, RM billion (LH S)
Retained im port cover (RH S)
Reserves/Short-term external debt (RH S)
2005 2004
0
2
4
6
8
10
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 64
65
The Malaysian Economy in 2005
Table 1.26
Flow of Funds: 2004
D om estic Econom y
Public Private Banking
Sector Sector System
RM billion
D isposable Incom e -410.4 131.1 279.3 0
C onsum ption 252.1 -59.3 -192.8 0
Investm ent 91.8 -53.4 -38.4 0
C hange in stocks 10.0 -10.0 0
Exports of G oods and N on-Factor Services 545.0 -545.0 0
Im port of G oods and N on-Factor Services -449.3 449.3 0
N et Factor Paym ents A broad -24.5 24.5 0
N et Transfers -14.6 14.6 0
N on-Financial Balance 0.0 18.4 38.2 0.0 -56.5 0
Foreign Financing
D irect Investm ent 9.7 -9.7 0
N et Foreign Borrow ings -1.1 20.3 -19.2 0
C hange in N et Foreign A ssets
Bank N egara M alaysia -75.1 75.1 0
Banking System -6.9 6.9 0
D om estic Financing
C hange in Bank C redit 4.1 31.0 -35.1 0
C hange in D eposits
1
-20.5 -67.9 88.4 0
N et Borrow ings from N on-Bank Sector -0.8 0.8 0
O ther item s (N et) -32.1 28.7 3.5 0
Sum 0 0 0 0
1
Includes currency in circulation.
N ational
A ccounts
Sum
Rest of the
W orld
Bank N egara M alaysia releases inform ation on the
international reserves position and the statem ent of
the Banks assets and liabilities on a fortnightly basis,
w ith a one-w eek lag. In addition, the Bank also
fulfills the IM Fs Special D ata D issem ination Standard
(SD D S) requirem ents on detailed disclosure of
international reserves and foreign currency liquidity
inform ation at the end of each m onth, w ith a one-
m onth lag. The reserves data tem plate also provides
forw ard-looking inform ation on the size,
com position and usability of reserves and other
foreign currency assets, and the future and potential
(contingent) inflow s and outflow s of foreign
exchange of the Federal G overnm ent and the Bank
over the next 12-m onth period.
FLOW OF FUNDS
The econom y registered a higher resource surplus of
RM 77.8 billion, representing 16.4% of G N P in 2005
(2004: RM 56.5 billion or 13.3% of G N P). In term s of
the balance of paym ents, the higher resource surplus
reflected the increase in net exports of goods and
services to RM 116.2 billion (2004: RM 95.7 billion). From
the perspective of the countrys savings-investm ent
balance, the higher resource surplus m ainly reflected the
higher net savings position of the private sector. The
flow of funds betw een various sectors of the econom y
in 2004 and 2005 are show n in Tables 1.26 and 1.27.
The resource surplus of the public sector w as slightly
higher at RM 19.9 billion in 2005 (2004: RM 18.4
billion). The resource surplus reflected entirely the
surpluses from the N FPEs of RM 34.1 billion, w hich
helped to offset the resource gap of the general
governm ent of RM 14.2 billion. The higher resource
surplus of the public sector w as due to the increase in
disposable incom e, w hich m ore than offset the
increase in public consum ption by the general
governm ent and higher investm ent by the N FPEs. The
disposable incom e of the public sector increased by
6.5% to RM 139.6 billion in 2005. This w as m ainly on
account of higher petroleum -related revenue
registered in the consolidated public sector. In
addition, the Federal G overnm ent also recorded higher
tax revenue am id sustained econom ic grow th and
efforts taken to enhance tax collection. The resource
gap of the general governm ent w as m ainly financed
C01 Malaysian Economy pg28-66 4/14/06, 15:49 65
66
Table 1.27
Flow of Funds: 2005
D om estic Econom y
Public Private Banking
Sector Sector System
RM billion
D isposable Incom e -456.1 139.6 316.5 0
C onsum ption 280.5 -64.6 -215.9 0
Investm ent 98.9 -55.2 -43.8 0
C hange in Stocks -1.1 1.1 0
Exports of G oods and N on-Factor Services 609.1 -609.1 0
Im ports of G oods and N on-Factor Services -492.9 492.9 0
N et Factor Paym ents A broad -21.5 21.5 0
N et Transfers -17.0 17.0 0
N on-Financial Balance 0.0 19.9 57.9 0.0 -77.8 0
Foreign Financing
D irect Investm ent 2.7 -2.7 0
N et Foreign Borrow ings -11.1 -45.3 56.3 0
C hange in N et Foreign A ssets
Bank N egara M alaysia -28.3 28.3 0
Banking System 11.8 -11.8 0
D om estic Financing
C hange in Bank C redit -1.5 44.6 -43.2 0
C hange in D eposits
1
-7.9 -45.0 52.9 0
N et Borrow ings from N on-Bank Sector 0.5 -0.5 0
O ther item s (N et) -14.4 6.8 7.6 0
Sum 0 0 0 0
1
Includes currency in circulation.
N ational
A ccounts
Sum
Rest of
the
W orld
through dom estic borrow ings. Som e of the financing
obtained by the general governm ent as w ell as the
resource surplus of the N FPEs w ere partly utilised for
the repaym ent of foreign debt, w hile the rest w ere
placed w ith the banking system .
The resource surplus of the private sector increased
to RM 57.9 billion or 12.2% of G N P in 2005
com pared w ith RM 38.2 billion or 9% of G N P in
2004. The favourable resource surplus position of
the private sector w as supported by im provem ent in
dom estic incom e and exports grow ing at a faster
rate than im ports in the external sector. These
factors contributed to the increase in disposable
incom e of the private sector to RM 316.5 billion
(2004: RM 279.3 billion), w hich in turn, supported
the continued grow th in private consum ption and
investm ent activities. In addition to the resource
surplus, net inflow s of FD I (RM 2.7 billion), and loans
from the banking system (RM 44.6 billion) also
contributed to the pool of funds available to the
private sector. Som e of the funds w ere channelled
tow ards the net paym ent of foreign obligations,
including portfolio outflow s, and the extension of
trade credit; w hile a portion w as also placed as
deposits w ith the banking system .
The current account surplus rem ained large enough
to m ore than offset private and official sector
outflow s in the financial account of the balance of
paym ents. A s such, Bank N egara M alaysias
international reserves (excluding net foreign
exchange revaluation losses) increased further, by
RM 28.3 billion.
C01 Malaysian Economy pg28-66 3/14/06, 9:12 PM 66
M onetary Policy in 2005
M onetary D evelopm ents in 2005
Exchange Rate D evelopm ents
Fiscal Policy and O perations
68-69
69-74
74-76
76-83
Monetary and Fiscal
Developments
68
Monetary and Fiscal Developments
MONETARY POLICY IN 2005
The conduct of m onetary policy in 2005 had the task of
balancing the risks to econom ic grow th and price stability.
W hile the M alaysian econom y benefited from the
sustained expansion in global grow th and w orld trade, the
country also faced greater uncertainties arising from
developm ents in the external environm ent, including
higher and m ore volatile energy prices, volatile short-term
capital flow s, large paym ent im balances, and the gradual
rem oval of m onetary accom m odation globally. The
upw ard trend in global oil prices led to increases in
headline inflation around the w orld. G lobally, m onetary
authorities increased interest rates in successive steps as
high oil prices fed into higher inflation and the build-up of
inflationary expectations. O il im porting countries faced
deterioration of their current account balances, w hile the
grow ing burden of oil subsidies in som e countries w as
reflected in their deteriorating fiscal positions. Despite the
m ore challenging global environm ent, the M alaysian
econom y show ed great resilience am id supportive
m onetary conditions and the stable financial positions of
the corporate, household and banking sectors. Inflation
w as higher, largely on account of the gradual adjustm ents
to adm inistered prices and the cost-induced adjustm ents
of other prices.
The response of m onetary policy to oil price shocks
depends largely on the second round inflationary
effects in term s of increases in other prices and w ages.
A n exclusive focus on output stabilisation m ay lead to
an inability to anchor inflationary expectations, w ith
w ages and prices self-reinforcing. O n the other hand,
em phasising only on neutralising the im pact of oil
price shocks on inflation, risks a significant contraction
in grow th and w elfare. M onetary policy, therefore,
needs to undertake a careful assessm ent of both the
risks to inflation and econom ic grow th over the
m edium term . It is the relative balance of these risks
that form ed the m ajor consideration in the stance of
m onetary policy for 2005.
A t the outset of 2005, a m oderate slow dow n in
external dem and w as expected in the first half of the
year, arising from the continued dow ncycle of the
global sem iconductor industry, as w ell as the global
m onetary tightening cycle in response to rising
inflationary concerns. D om estic G D P grow th had
m oderated to 5.8% in the fourth quarter of 2004. In
M ay, it w as evident that the econom y had rem ained
resilient in the first quarter of 2005, w ith G D P
expanding by 6.2% . M eanw hile, inflation, as m easured
by the annual rate of change in the C PI, increased to an
average of 2.5% for the first four m onths of the year,
m ainly on account of the increases in adm inistered prices
and prices of controlled item s in late 2004 and early
2005. The inflation rate w as expected to edge upw ards
over the subsequent m onths, m ainly reflecting
adjustm ents in costs, before m oderating later in the year.
Follow ing the increases in transportation charges and
retail prices of petrol and diesel in M ay, the inflation rate
breached the 3% level and stood at 3.2% at the end of
the second quarter. C ore inflation, w hich is indicative of
dem and-driven inflation, in contrast, registered a m ore
gradual increase in the first half of the year. Real sector
and m onetary indicators did not suggest that dem and
pressures w ere a source of inflationary concern.
C onsum ption and investm ent activities w ere holding
steady. Bank lending and m oney supply continued to
increase at relatively stable rates. The lack of strong
dem and pressures allow ed m onetary policy to continue
to rem ain accom m odative to support econom ic grow th.
O n the external front, there w as an increase in net
portfolio flow s in the first half of the year, follow ing
speculation of a revaluation of the C hinese yuan and
ringgit. These inflow s, how ever, w ere m anageable. The
Bank sterilised this additional liquidity. There w ere no
signs of excessive credit grow th or sharp increases in
asset prices.
O n 21 July, the Bank adopted a m anaged float
exchange rate regim e for the ringgit, w ith the value of
the ringgit being determ ined by econom ic fundam entals
(See Exchange Rate Developments). W hile the
system by w hich the value of the ringgit is determ ined
w as changed, there w as no change to the existing
m onetary policy fram ew ork, w here the average
overnight interbank rate continues to function as the
operating target.
A t the tim e of release of the third M onetary Policy
Statem ent in A ugust, the international environm ent had
becom e m ore challenging, w ith increased uncertainty
over the likely econom ic im pact of oil prices that had
reached new record highs. In the dom estic econom y,
indicators suggested that overt dem and pressures had
been relatively contained in the second quarter. A m ore
m oderate pace of econom ic expansion of 4.4% w as
registered during the period. In term s of production
capacity, the w eighted average of capacity utilisation in
C02 Monetary & Fiscal pg68-84 3/14/06, 9:12 PM 68
69
Monetary and Fiscal Developments
the m anufacturing sector rem ained stable at 76% .
Furtherm ore, labour productivity, as m easured by real
sales value of products per em ployee in the
m anufacturing sector, rose by 9.6% w hile real w age per
em ployee declined by 0.4% . The risks of slow er grow th
and higher inflation respectively appeared to be in
balance. Inflation rose to 3.7% in A ugust, follow ing the
second increase in adm inistered prices of retail petrol
products. The Bank view ed that the cum ulative im pact
of the price adjustm ents w ould cause inflation to peak
in the third quarter and to m oderate thereafter, barring
further price adjustm ents during the year, as the effect
of the previous years price adjustm ents lapsed.
Therefore, although real returns on savings and short-
term fixed deposits had turned negative, this situation
w as not expected to persist for long.
Tow ards the latter part of the year, it becam e m ore
evident that the grow th m om entum of the global
econom y rem ained intact. The electronics sector show ed
signs of a pick-up, w hile dom estic dem and indicators
strengthened. The econom y expanded at a higher rate of
5.3% in the third quarter, w ith the grow th m om entum
expected to continue into the fourth quarter of 2005 and
into 2006. Inflation, m eanw hile, m oderated slightly to
3.3% in O ctober. C ore inflation had increased by sm all
increm ents and w as expected to continue to increase at a
steady pace going forw ard. A high level of uncertainty
rem ained w ith regard to the upside risk to oil prices. W ith
the risk of slow er grow th dim inishing, and inflation risks
biased tow ards the upside, the O PR w as raised by 30
basis points to 3% on 30 N ovem ber 2005. A t 3% , the
O PR continued to rem ain below its neutral level, and
therefore, rem ained supportive of econom ic activity.
MONETARY DEVELOPMENTS IN 2005
In 2005, m onetary conditions rem ained supportive of
dom estic econom ic activity. The O PR w as m aintained at
2.70% in the first 11 m onths of the year. Tow ards the
end of the year, w ith the risk of slow er econom ic
grow th dim inishing and inflation risks biased tow ards
the upside, the O PR w as increased by 30 basis points to
3.00% on 30 N ovem ber 2005.
28 February 2.70%
25 M ay 2.70%
24 A ugust 2.70%
30 N ovem ber 3.00%
Table 2.1
Monetary Policy Decisions
The M onetary Policy C om ittee (M PC ) m et eight tim es in 2005. M onetary
Policy Statem ents (M PS) to convey the policy decision w ere issued
follow ing four of those m eetings to coincide w ith the release of the
quarterly G D P data. Since its introduction in A pril 2004, the O PR
rem ained unchanged at 2.70% until the end of N ovem ber 2005. O n
30 N ovem ber, the O PR w as increased by 30 basis points to 3% .
O vernight Policy Rate
(O PR)
M PS D ate
As growth strengthened and
with inflationary pressures
remaining strong, the OPR was
increased to 3%.
Follow ing the floating of the ringgit, speculative portfolio
positions that had been built-up in the first half of the
year, started to be unw ound in Septem ber and continued
into O ctober and N ovem ber. These outflow s, how ever,
subsided in D ecem ber. The unw inding of these flow s w as
orderly. In the debt securities m arket, local institutional
dem and w as a stabilising force. Price adjustm ents w ere
orderly in the m arket for short-term bills and G overnm ent
securities. The high international reserves level provided
sufficient cushion for outflow s w hile the dom estic
financial system continued to be characterised by a
situation of am ple liquidity.
Monetary conditions remained
supportive of economic activity.
The daily w eighted average overnight interbank rate
m oved in the range of 2.60% 2.73% and averaged
2.70% over the period January N ovem ber 2005.
Graph 2.1
Lending Rates: Commercial Banks and
Finance Companies
6.20
6.12
7.03
8.66
5
6
7
8
9
10
11
12
J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N
2001 2002 2003 2004 2005
%
BLR-C B A LR-C B
BLR-FC A LR-FC
C02 Monetary & Fiscal pg68-84 3/14/06, 9:12 PM 69
70
Table 2.2
Interest Rates and Liquidity
2002 2003 2004 2005
A s at end-period (% )
3-m onth Intervention Rate 5.0 4.5 - -
O vernight policy rate (O PR)
1
- - 2.70 3.00
Interbank rates
O vernight 2.71 2.72 2.69 3.00
1-m onth 2.99 2.99 2.77 3.12
Base lending rate (BLR)
C om m ercial banks 6.39 6.00 5.98 6.20
Finance com panies 7.45 6.90 6.90 7.03
A verage lending rate (A LR)
C om m ercial banks 6.51 6.11 5.98 6.12
Finance com panies 9.75 9.11 8.78 8.66
A LR of new loans approved by com m ercial banks
Business loans 6.25 5.72 5.64 5.70
of which: SMEs 6.84 6.30 6.20 6.36
H ousehold loans
2
4.66 4.32 4.34 4.09
Fixed deposit rates
C om m ercial banks
3-m onth 3.20 3.00 3.00 3.02
12-m onth 4.00 3.70 3.70 3.70
Finance com panies
3-m onth 3.20 3.00 3.00 3.00
12-m onth 4.00 3.68 3.70 3.70
Savings deposits rates
C om m ercial banks 2.12 1.86 1.58 1.41
Finance com panies 2.65 2.18 1.98 1.53
A verage during the period (% )
N om inal interest rate differential
M alaysia U nited States 1.31 1.66 1.16 -0.77
M alaysia Singapore 2.15 2.14 1.79 0.57
A s at end-period (RM billion)
Resource surplus (+) / gap (-) 76.2 106.0 134.8 155.6
A djusted resource surplus (+) / gap (-)
3
24.6 45.9 77.0 98.6
A s at end-period (% )
Loan-deposit ratio 84.9 80.9 78.4 77.5
Financing-deposit ratio
3
95.1 91.7 87.7 85.8
1
O PR replaced 3-m onth intervention rate as Bank N egara M alaysia's policy rate from 26 A pril 2004.
2
Excludes credit cards.
3
A djusted to include holdings of Private D ebt Securities.
Follow ing the increase in the O PR, the daily w eighted
average overnight interbank rate rose in D ecem ber, to
m ove w ithin a tight band of 2.97% 3.01% , averaging
3.00% . Interbank rates of other tenures, nam ely the
1-w eek, 1-m onth and 3-m onth m aturities, w hich had
show n m ild upw ard trends since A pril on m arket
expectations of an increase in the O PR, rose by 23 32
basis points in D ecem ber.
W ith dom estic interest rates unchanged for m ost of the
year, interest rate differentials betw een dom estic and U S
rates turned negative in February and continued to
w iden as the U S Federal Funds rate steadily increased.
N otw ithstanding this developm ent, dom estic liquidity
continued to increase am id sustained inflow s from
the external sector. These inflow s m ainly reflected the
repatriation of export earnings and foreign direct
investm ent, and w ere also reinforced by significant
inflow s of portfolio investm ent in the first half of the
year. The large inflow s of short-term funds w ere in
part, driven by expectations of a change in the ringgit
exchange rate regim e. These speculative flow s w ere
largely unw ound in Septem ber through N ovem ber,
and subsided by D ecem ber. In view of the
m agnitude and volatility of these flow s, Bank N egara
M alaysias m oney m arket operation w as to ensure
that conditions in the dom estic financial m arkets
rem ained orderly.
C02 Monetary & Fiscal pg68-84 4/14/06, 13:21 70
71
Monetary and Fiscal Developments
m ore m oderately, as reflected in new loan applications,
w hich rose by 11.7% (2004: 20.1% ). The ratio of new
approvals to applications, m eanw hile, rem ained
relatively stable w ith new loan approvals am ounting to
RM 193.4 billion or an annual increase of 11.4% (2004:
13.6% ). Loan disbursem ents increased by 8.4% (2004:
10.6% ), significantly exceeding loan repaym ents, and
providing m om entum to the steady increase of 8.6% in
loans outstanding at end-2005 (2004: 8.5% ).
Trends in the loan indicators w ere reflective of
developm ents in the real sector; w ith resilient grow th in
private consum ption and investm ent, and the services
sub-sector being the m ain grow th driver. G row th in
dem and for new bank loans w as observed across m ost
business sub-sectors, w ith total new loan applications
increasing at a m ore m oderate rate of 5.7% in 2005
(2004: 20% ). By econom ic sub-sectors, the slow er pace
of grow th in new business loan applications w as m ainly
attributable to a decline in applications from the
construction sector, as w ell as slow er increases in
applications from the m anufacturing sector; the
w holesale and retail trade, restaurants and hotels sector;
and for the purchase of non-residential property.
N otw ithstanding the m ore m oderate increase in
applications, grow th in new loan approvals w as stable
at 9.8% w hile loan disbursem ents increased by 7.4%
(2004:10.5% ), w ith higher or sustained disbursem ents
recorded to m ost of the business sectors. In particular,
the grow th in total business loan disbursem ents w as
m ainly from loans to the w holesale and retail trade,
restaurants and hotels sector, w hich increased by 16.5%
on an annual basis.
D uring the year, corporate financial conditions rem ained
healthy as reflected by indicators such as profitability,
leverage and corporate savings. C apital expenditure
In term s of retail interest rates, the average base
lending rates (BLRs) of com m ercial banks and finance
com panies rem ained unchanged at 5.98% and 6.90%
respectively over the period January to N ovem ber.
Follow ing the increase in the O PR, m ost banking
institutions adjusted their BLRs upw ards in the range of
25 30 basis points. C onsequently, the average BLRs
of com m ercial banks rose to 6.20% at end-D ecem ber.
M eanw hile, the average lending rates (A LRs) of
com m ercial banks and finance com panies, w eighted by
outstanding loans, w ere relatively stable w ith a m odest
upw ard tendency over the period January to
N ovem ber. The m erger of tw o large finance com panies
w ith their respective com m ercial banks resulted in
som e technical adjustm ent to the A LRs of the latter,
w hich in turn had a m arginal upw ard im pact on the
overall A LR for com m ercial banks. Follow ing the
adjustm ent to BLRs after the policy rate increase, the
A LR of com m ercial banks rose to 6.12% .
M eanw hile, the A LRs on new loans approved indicated
that financing costs in general, w ere m arginally low er
for businesses (including SM Es) and households for
m ost of the year com pared w ith 2004. This w as
notw ithstanding the slight upw ard trend in interest
rates on loans approved to the household sector in the
second half of the year.
In term s of retail fixed deposit (FD ) rates, adjustm ent to
the rates w ere m ade by a num ber of banking
institutions. These adjustm ents w ere concentrated in
the m iddle tenures, such as the 6-m onth and 9-m onth
m aturities w hile the rates for the 1-m onth and 12-
m onth m aturities w ere m ostly unchanged at 3.00% and
3.70% . The slow er response of deposit rates to the
change in the O PR, relative to lending rates, reflected
the continued prevalence of am ple liquidity in the
financial system . This w as also reflected by the low er
loan-deposit and financing-deposit ratios at 77.5% and
85.8% respectively as at end-2005 (2004: 78.4% and
87.7% respectively).
W ith accom m odative m onetary conditions, there w as
continued grow th in financing of the private sector
during the year. G ross financing extended through the
banking system and capital m arkets expanded by 8.9%
in 2005 (2004: 5.7% ), w ith higher loan disbursem ents
and higher funds raised in the private debt securities
(PD S) m arket. O n a net basis, banking system loans and
PD S outstanding rose at a com bined annual rate of
9.3% at end-2005 (8.6% at end-2004).
Bank lending activity expanded further in 2005.
D em and for new credit continued to increase, albeit
Graph 2.2
Private Sector Gross Financing through the
Banking System and the Capital Market
9.8%
5.8%
9.0%
5.7%
8.9%
2001 2002 2003 2004 2005
Loans disbursed G ross PD S issuance Equity
200
250
300
350
400
450
500
550
600
RM billion

C02 Monetary & Fiscal pg68-84 3/14/06, 9:12 PM 71
72
continued to increase, and w as supported by internally
generated funds as w ell as financing via bank loans and
the PD S m arket. N ew loan applications by large
corporations increased at a m ore m oderate rate of 3.2%
(2004: 19.1% ) w hile loan disbursem ents rose by 6.2%
(2004: 8.6% ). M eanw hile, in the PD S m arket, w here
borrow ing costs rem ained com petitive, funds raised by
businesses for new activities increased, and w ere m ainly
channeled to the utilities and construction sectors.
Follow ing continued efforts to enhance access to
financing by SM Es, loans to this sector continued to
expand in 2005, notw ithstanding the m ore challenging
environm ent. SM Esdem and for loans continued to
increase as reflected in the increase of 10.3% in new
loan applications (2004: 21.7% ). Im portantly, this
grow th w as closely m atched by an increase in loan
approvals of 13.1% (2004: 22% ). A total of RM 110.7
billion loans w ere disbursed to the sector, representing
an expansion of 10.2% on an annual basis, and
accounting for a slightly higher proportion of 30.7% of
total loan disbursem ents to businesses.
N otw ithstanding som e w eakening in consum er
sentim ent during the second and third quarters,
household consum ption and investm ent activities
generally rem ained resilient, supported by rising incom e,
stable labour m arket conditions, and attractive financing
options. The year saw a significant rise in passenger car
sales, and continued grow th in retail sales and im ports
of consum ption goods. The launch of new car m odels,
particularly of national cars, led to a strong increase of
34.4% in loan disbursem ents for the purchase of
passenger cars on an annual basis (2004: 18.8% ).
Loans disbursed for credit card transactions, m eanw hile,
increased by 17.6% (2004: 19.1% ). A t end-2005,
Table 2.3
Banking System
1
: Loan Indicators
D uring the year (RM billion) A nnual grow th (% )
2001 2002 2003 2004 2005 2001 2002 2003 2004 2005
Total
Loan applications 190.6 217.2 227.6 273.3 305.4 -8.7 14.0 4.8 20.1 11.7
Loan approvals 125.6 137.6 152.8 173.6 193.4 -6.8 9.5 11.1 13.6 11.4
Loan disbursem ents 373.5 411.6 441.5 488.2 529.3 3.5 10.2 7.3 10.6 8.4
Loan repaym ents 365.4 402.7 430.4 461.6 489.2 5.3 10.2 6.9 7.3 6.0
C hange in loans outstanding
2
16.1 19.8 21.6 40.1 44.2 3.9 4.6 4.8 8.5 8.6
Businesses
Loan applications n.a. 135.3 124.9 149.9 158.5 n.a. n.a. -7.7 20.0 5.7
Loan approvals 63.5 68.5 77.3 84.9 93.2 -19.7 7.9 12.8 9.8 9.8
Loan disbursem ents 270.4 282.0 303.3 335.3 360.1 0.1 4.3 7.6 10.5 7.4
Loan repaym ents 276.8 275.8 299.5 319.8 343.7 2.8 -0.4 8.6 6.8 7.5
C hange in loans outstanding
2
-5.6 -3.1 -5.2 5.5 6.5 -2.5 -1.4 -2.4 2.6 3.0
SMEs
Loan applications n.a. 48.7 44.5 54.2 59.7 n.a. n.a. -8.6 21.7 10.3
Loan approvals n.a. 30.7 25.9 31.6 35.8 n.a. n.a. -15.5 22.0 13.1
Loan disbursem ents n.a. 49.5 87.1 100.4 110.7 n.a. n.a. 76.0 15.3 10.2
C hange in loans outstanding
2
4.0 ... 7.4 6.3 7.7 5.7 10.0 7.7 8.7
Large corporations
Loan applications n.a. 86.6 80.4 95.7 98.8 n.a. n.a. -7.2 19.1 3.2
Loan approvals n.a. 37.8 51.4 53.3 57.4 n.a. n.a. 35.8 3.7 7.8
Loan disbursem ents n.a. 232.5 216.2 234.9 249.5 n.a. n.a. -7.0 8.6 6.2
C hange in loans outstanding
2
-9.6 -3.1 -12.7 -0.8 -1.2 -6.1 -2.1 -8.8 -0.6 -0.9
Households
Loan applications n.a. 81.9 98.4 120.2 141.9 n.a. n.a. 20.2 22.1 18.0
Loan approvals 59.2 66.9 72.0 86.8 97.2 11.5 13.0 7.6 20.5 12.0
Loan disbursem ents 87.0 105.1 114.4 130.3 145.2 14.5 20.8 8.9 13.9 11.4
Loan repaym ents 71.5 83.7 94.1 107.0 115.1 9.9 17.0 12.4 13.7 7.6
C hange in loans outstanding
2
23.1 26.2 26.2 33.3 40.0 14.8 14.7 12.8 14.4 15.1
1
Includes Islam ic banks.
2
The annual grow th is for loans outstanding at end-period.
n.a. N ot available
... N egligible
C02 Monetary & Fiscal pg68-84 3/14/06, 9:12 PM 72
73
Monetary and Fiscal Developments
Graph 2.3
Loan Disbursements by Sector: Value and Share
C redit cards
(RM 43 b; 8% )
2004 2005
W holesale & retail
trade, restaurants
and hotels
(RM 84 b; 17% )
C onstruction
(RM 30 b; 6% )
Finance,
insurance and
business services
(RM 37 b; 7% )
Residential
property
(RM 39 b; 8% )
Passenger cars
(RM 29 b; 6% )
C redit cards
(RM 36 b; 7% )
W holesale & retail
trade, restaurants
and hotels
(RM 98 b; 18% )
C onstruction
(RM 30 b; 6% )
Finance,
insurance and
business services
(RM 36 b; 7% )
Residential
property
(RM 38 b; 7% )
Passenger cars
(RM 39 b; 7% )
O thers
(RM 112 b; 23% )
M anufacturing
(RM 122 b; 25% )
O thers
(RM 118 b; 22% )
M anufacturing
(RM 127 b; 24% )
outstanding balances on credit cards am ounted to
RM 16.7 billion, expanding by 17.3% on an annual
basis, and accounting for 3% of total banking system
loans outstanding.
In term s of household investm ent in residential property,
loan disbursem ents for the purchase of residential
property declined m arginally by 0.9% (2004: 9.1% ),
after the strong increase in the previous year, w hich w as
driven to som e extent, by the hom e-ow nership
incentives that w as im plem ented in June 2003 and
lapsed in June 2004.
Although lending to households has continued to increase,
the debt service burden on an aggregate basis rem ains
m anageable for households. Defaults on paym ents
Table 2.4
Banking System
1
: Loans Outstanding
A nnual change
% share of
total loans
2004 2005
at end
RM billion
2005
Banking system loans, of which
extended to:
Business enterprises 5.5 6.5 40.4
Individuals 33.3 40.0 54.5
By sector:
A griculture, hunting, forestry and
fishing 0.4 0.1 2.0
M ining and quarrying -0.1 -0.2 0.1
M anufacturing 1.9 -2.4 10.9
Electricity, gas and w ater supply 0.1 -0.5 0.8
W holesale and retail trade,
restaurants and hotels 4.3 3.6 8.4
Broad property sector 19.7 20.5 41.0
Construction 1.2 -0.7 5.4
Purchase of residential property 16.4 16.3 26.7
Purchase of nonresidential
property 2.3 4.0 6.3
Real estate -0.2 1.0 2.6
Transport, storage and
com m unication -0.8 1.4 2.0
Finance, insurance and business
services 1.7 -0.8 5.4
C onsum ption credit 14.6 19.4 22.1
of which:
Credit cards 2.0 2.5 3.0
Purchase of passenger cars 10.6 14.4 15.5
Purchase of securities -0.4 1.5 3.7
Purchase of transport vehicles -0.8 0.4 0.5
C om m unity, social and personal
services 0.1 0.6 1.0
O thers -0.7 0.4 1.9
Total loans outstanding
2
40.1 44.2 100.0
1
Includes Islam ic banks.
2
Includes loans sold to C agam as.
N ote: N um bers m ay not addup due to rounding.
Graph 2.4
Banking System: Loans to Households
(at end-period)
RM billion %
50
100
150
200
250
300
350
2001 2002 2003 2004 2005
0.0
2.0
4.0
6.0
8.0
10.0
Total household loans
Share of household N PLs to total loans (RH S)
Share of household N PLs to household loans (RH S)
C02 Monetary & Fiscal pg68-84 4/14/06, 13:19 73
74
rem ained relatively stable. H ousehold N PLs as a
percentage of total outstanding loans to the household
sector displayed a stable trend and stood at 7.5% at
end-D ecem ber 2005 (end-D ecem ber 2004: 7.6% ).
M eanw hile, the num ber of individual bankruptcies
declined by 2.4% on an annual basis. H ouseholdsnet
w ealth position also rem ained strong, w ith indicators
such as deposits and other financial investm ents
suggesting that household financial assets continue to
exceed household debt. These factors, along w ith
benign trends in house prices, support the sustainability
of household consum ption and investm ent activity. The
num ber of overstretched households w hose capacity to
service and repay loans could be affected by unexpected
developm ents rem ains sm all. Prudent lending practices
as w ell as ready access to com prehensive credit
inform ation am ong banks via the C entral C redit
Reference Inform ation System (C C RIS) has led to
im proved risk m anagem ent in the financial sector, w hich
has been im portant in balancing credit risk exposures.
N evertheless, as a pre-em ptive m easure, Bank N egara
M alaysia has established the C redit C ounseling and
D ebt M anagem ent A gency, w hich w ill com m ence
operations in the first quarter of 2006, to address
potential credit issues that m ay be faced by households.
M oney supply continued to increase during the year, in
tandem w ith econom ic and financial developm ents.
Broad m oney, M 3, displayed a relatively stable grow th
trend in the first half of the year, w hich subsequently
m oderated slightly tow ards end-year. A t end-2005, M 3
had increased at an annual rate of 8% (end-2004:
12.4% ). H igher private sector financing during the year
w as the m ain driver of the expansion in M 3. In addition,
the external sector also contributed to M 3 grow th,
albeit to a lesser extent com pared w ith 2004. In
particular, in the last few m onths of the year, net foreign
assets exerted a contractionary im pact on M 3, reflecting
to a large extent, the unw inding of speculative long
positions in the ringgit.
M eanw hile, M 1, w hich is a m easure of transaction
balances, expanded at an annual rate of 8.5% in 2005
(2004: 11.9% ), roughly in tandem w ith the sustained
grow th of spending activity.
EXCHANGE RATE DEVELOPMENTS
O n 21 July 2005, M alaysia shifted from a fixed
exchange rate regim e of U SD 1 = RM 3.80 to a m anaged
float against a basket of currencies. The policy shift w as
taken to better position M alaysia to respond to and
RM billion %
5
10
15
20
25
30
35
40
45
2
-
4
6
8
10
12
2001 2002 2003 2004 2005
Graph 2.5
Aggregate Value of Credit Card Transactions by
Malaysian Cardholders
C ash advances Purchases
% of cash advances to total transactions (RH S)
A nnual G row th (% )
Graph 2.6
Monetary Aggregates
5
7
9
11
13
15
17
19
21
D
e
c

0
2
M
a
r

0
3
J
u
n

0
3
S
e
p

0
3
D
e
c

0
3
M
a
r

0
4
J
u
n

0
4
S
e
p

0
4
D
e
c

0
4
M
a
r

0
5
J
u
n

0
5
S
e
p

0
5
D
e
c

0
5
M 1: 8.5%
M 3: 8.0%
Table 2.5
Broad Money, M3
C hange (RM billion)
2004 2005
M3 68.0 49.7
C urrency 2.6 1.6
D em and deposits 10.1 8.7
Broad quasi m oney 55.3 39.4
Fixed deposits 24.7 4.9
Savings deposits 6.1 1.9
NIDs 8.2 12.8
Repos 13.3 17.3
FX deposits 3.0 2.5
Determinants of M3
N et claim s on G overnm ent -15.9 -5.5
C laim s on private sector 30.6 45.4
Loans 39.8 45.0
Securities -9.2 0.4
N et external operations 82.0 16.5
Bank Negara Malaysia 75.1 28.3
Banking system 6.9 -11.8
O ther influences -28.7 -6.7
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 74
75
Monetary and Fiscal Developments
benefit from the structural changes occurring in the
region. W ith regional countries becom ing increasingly
im portant trading partners to M alaysia, their im portance
is expected to increase further over tim e in line w ith
regional efforts to prom ote closer econom ic and
financial inter-linkages.
The overriding objective of the exchange rate policy
continues to be the prom otion of exchange rate stability
against the currencies of M alaysias m ajor trading
partners. Being a sm all and highly open econom y, a
stable exchange rate environm ent against m ajor trading
partners is im portant to achieve sustainable grow th and
price stability. U nder the m anaged float system , the
ringgit exchange rate is largely determ ined by ringgit
dem and and supply in the foreign exchange m arket.
The C entral Bank does not actively m anage or m aintain
the exchange rate at any particular level econom ic
fundam entals and m arket conditions are the prim ary
determ inants of the level of the ringgit exchange rate.
In this regard, the C entral Bank only intervenes to
m inim ise volatility, and to ensure that the exchange rate
does not becom e fundam entally m isaligned.
The ringgit exchange rate regim e, and therefore
m ovem ent in the ringgit exchange rate can be
distinguished by tw o periods in the year 2005. The fixed
exchange rate regim e of USD1 to RM 3.80 w as m aintained
from 1 January 21 July 2005, as it had been m aintained
since 2 Septem ber 1998. During this period,
developm ents in the ringgit w ere driven entirely by
m ovem ents in the US dollar and the consequent
realignm ents of m ajor and regional currencies against the
US currency. During 2005, the dollar appreciated against
the m ajor currencies am idst expectations of continued
increases in the US Federal Funds Rate, w hich w idened
yield differentials in favour of the US dollar, as w ell as on
continued expectations that econom ic grow th in the US
w ould outpace that of the euro area and Japan. The US
dollar w as also supported by sustained dem and for US
assets by international investors. Regional currencies w ere,
in general, also affected by concerns that higher oil prices
w ould increase im port costs and dam pen dem and for
regional exports. Due to the US dollar strength, the ringgit
appreciated against the euro (11.9% ), pound sterling
(10.4% ) and Japanese yen (9.7% ). Sim ilarly, the ringgit
appreciated w ithin the range of 0% - 7.7% against
regional currencies, w ith the exception of the depreciation
against the Philippine peso (0.6% ).
Table 2.6
Movements of the Ringgit
RM to one unit of foreign currency
1
A nnual change (% ) C hange (% )
1997 1998 2004 2005 2006
2004 2005
End-June 97- 2 Sept.98 - End-D ec 05-
End-June
2
Sept. 2
3
End-D ec. Feb. 28
D ec. 2005 Dec. 2005 28 Feb. 06
SD R 3.5030 5.1177 5.8818 5.4020 5.3234 -4.3 8.9 -35.2 -5.3 1.5
U S dollar 2.5235 3.8000 3.8000 3.7800 3.7135 0.0 0.5 -33.2 0.5 1.8
Singapore dollar 1.7647 2.1998 2.3258 2.2714 2.2857 -3.9 2.4 -22.3 -3.2 -0.6
100 Japanese yen 2.2088 2.7742 3.7026 3.2229 3.1907 -4.0 14.9 -31.5 -13.9 1.0
Pound sterling 4.1989 6.3708 7.3169 6.5226 6.4643 -7.5 12.2 -35.6 -2.3 0.9
Sw iss franc 1.7368 2.6450 3.3517 2.8825 2.8106 -8.6 16.3 -39.7 -8.2 2.6
Euro
4
5.1729 4.4867 4.4055 -7.6 15.3 1.8
100 Thai baht 9.7470 9.3713 9.7636 9.2049 9.4407 -1.7 6.1 5.9 1.8 -2.5
100 Indonesian rupiah 0.1038 0.0354 0.0408 0.0385 0.0402 9.8 6.2 169.9 -7.9 -4.4
100 Korean w on 0.2842 0.2827 0.3671 0.3739 0.3827 -13.4 -1.8 -24.0 -24.4 -2.3
100 Philippine peso 9.5878 8.8302 6.7706 7.1254 7.1793 1.1 -5.0 34.6 23.9 -0.8
C hinese renm inbi 0.3045 0.4594 0.4591 0.4686 0.4619 0.0 -2.0 -35.0 -2.0 1.5
1
U S dollar rates are the average of buying and selling rates at noon in the Kuala Lum pur Interbank Foreign Exchange M arket.
Rates for foreign currencies other than U S dollar are cross rates derived from rates of these currencies against the U S dollar and the RM /U S dollar rate.
2
End-June 1997 represents pre-A sian Financial C risis levels.
3
Ringgit w as fixed at U SD 1 = RM 3.8000 on 2 Septem ber 1998.
4
The euro began to be traded on 4 January 1999 (EU R 1= RM 4.5050).
3
2
4
5
6
7
8
1999 2000 2001 2002 2003 2004 2005 1998
2
3
4
5
6
7
8
(W eekly average) RM /foreign currency RM /foreign currency
Graph 2.7
Exchange Rate of the Malaysian Ringgit against
Major Currencies
M J S D M J S D M J S D M J S D M J S D M J S D M J S D
STG
Euro
U SD
100 Yen
Ringgit fixed at U SD 1=RM 3.80
Ringgit on a
m anaged float regim e
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 75
76
W ith the ringgit strengthening significantly since the
beginning of 2005, any undervaluation that existed as a
result of the U S dollar depreciation in 2003 and 2004
had effectively been reversed. The exchange rate w as
therefore not expected to change substantially at the
tim e of the change to the new regim e. The price
discovery process follow ing the unpegging of the ringgit
w as orderly, resulting in relative stability of the exchange
rate. D uring the period after the m ove to a m anaged
float regim e, betw een 22 July 30 D ecem ber 2005, the
ringgit m oved not only against the U S dollar, but also
other m ajor and regional currencies, and reflected the
overall strength of the dom estic econom y. There w as,
how ever, a substantial unw inding of the large
speculative long positions in the ringgit. D uring the
rem aining part of the year, since the introduction of the
new regim e, the ringgit appreciated against the U S
dollar (0.5% ), Japanese yen (4.7% ), euro (3% ) and
pound sterling (1.6% ). A gainst regional currencies, the
ringgit depreciated w ithin the range of 0.6% - 4.4% ,
the exception being an appreciation of 0.5% against
the Indonesian rupiah.
For the year as a w hole, the ringgit appreciated against
the U S dollar (0.5% ), euro (15.3% ), Japanese yen
(14.9% ) and pound sterling (12.2% ). A gainst the
regional currencies, the ringgit recorded a m ixed
perform ance, appreciating against the Indonesian
rupiah (6.2% ), Thai baht (6.1% ) and Singapore dollar
(2.4% ), but depreciating against the Philippine peso
(5% ), C hinese renm inbi (2% ) and Korean w on (1.8% ).
FISCAL POLICY AND OPERATIONS
Fiscal policy in 2005 rem ained focused on im proving the
Federal G overnm ents financial position w hile
supporting capacity building to enhance econom ic
grow th. The G overnm ent continued to play a supportive
role in facilitating the further entrenchm ent of the
private sector as the m ain engine of grow th. The Federal
G overnm ents overall m acroeconom ic strategy
continued to concentrate on reinforcing econom ic
grow th by stim ulating dom estic sources of grow th,
enhancing hum an capital developm ent, im proving
capacity of delivery system of the G overnm ent and
prom oting higher productivity. These efforts, together
w ith supportive m onetary policy, enabled total private
sector consum ption and investm ent to sustain a strong
expansion of 9.5% to contribute 5.7 percentage points
of econom ic grow th.
While fiscal policy in 2005
continued to focus on capacity
building to support economic
growth, the Federal
Governments fiscal
consolidation strategy remained
on course with a lower fiscal
deficit of 3.8% of GDP.
N otw ithstanding higher petroleum -related expenditure,
the continued fiscal discipline and prudence in spending,
com bined w ith a favourable revenue perform ance, led to
an im provem ent in the Federal Governments financial
position. The Federal G overnm ent registered a sm aller
overall deficit of RM 18.7 billion or 3.8% of G D P. The
reduction of fiscal deficit for the third successive year
underscored the G overnm ents strong com m itm ent to a
policy of fiscal consolidation. W ith this m anageable
deficit, the G overnm ent w ill now have the added
2000 2001 2002 2005 2004 2003
80
90
100
110
120
130
80
90
100
110
120
130
D J M J S D M J S D M J S D M J S D M J S D
Index (D ec. 2000=100) Index (End-m onth)
Graph 2.8
Exchange Rate of the Malaysian Ringgit against
Selected Regional Currencies
N ote : A n increase in the index represents an appreciation of the currency against
the ringgit.
Peso
S$
Rupiah
Baht
W on
Renm inbi
Table 2.7
Federal Government Finance
2004 2005p
RM m illion
Revenue 99,397 106,304
O perating expenditure 91,298 97,744
Current account 8,099 8,560
% of GDP 1.8 1.7
N et developm ent expenditure 27,518 27,284
Gross development expenditure 28,864 30,534
Loan recoveries 1,346 3,250
Overall balance -19,419 -18,724
% of GDP -4.3 -3.8
p Prelim inary
N ote: N um bers m ay not add up due to rounding.
Source: M inistry of Finance
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 76
77
Monetary and Fiscal Developments
flexibility to provide m ore resources for activities that w ill
contribute to further strengthening the econom ic
resilience of the econom y.
Federal G overnm ent revenue continued to rise,
increasing by 6.9% to RM 106.3 billion in 2005,
reflecting sustained grow th in the M alaysian econom y
and higher petroleum -related revenue. H igher tax
revenue collection also reflected the concerted efforts
m ade by the G overnm ent to broaden the tax base.
The proportion of total revenue to G D P rem ained at a
high level of 21.5% (2004: 22.1% ). Both categories
of tax revenue, direct and indirect taxes, increased in
2005, and resulted in larger shares of 50.4% and
25.4% of total revenue, respectively (2004: 49% and
23.5% , respectively). Receipts from the petroleum
incom e tax registered a significant grow th of 26.9%
follow ing higher oil prices. Favourable business
perform ance and further im provem ents in the tax
collection m achinery contributed to the increased
revenue from corporate incom e tax. H igher revenue
w as achieved despite the re-com putation of current
year corporate tax after taking into account treatm ent
for tax refund. In addition, several tax concessions
and incentives w ere introduced in 2005 to prom ote
private investm ent activity and to reduce the
corporate tax burden. D uring the year, m easures
taken by the Inland Revenue Board included
enhancing its services and intensifying collection
efforts through stricter enforcem ent. H ow ever,
individual incom e tax collections w ere low er. D uring
the year, higher tax relief w as provided to assist
disabled taxpayers, for expanding the use of
inform ation and com m unications technology by
households, and to inculcate the habit of reading.
C om m encing in 2005, the Self A ssessm ent System
w as introduced for individual taxpayers as part of the
G overnm ents effort to m odernise and stream line the
tax adm inistrative system .
The G overnm ent continued to em phasise efficiency and
effectiveness in its financial m anagem ent by
stream lining tax m easures, im proving tax adm inistration
and intensifying collection efforts. In 2005, the
G overnm ent established a Taxation System Review Panel
com prising representatives from the public and private
sectors to review the tax system . Tax adm inistration w as
enhanced w ith the setting up of the Fund for Tax
Refund to expedite incom e tax refunds.
M ost m ajor sources of indirect taxes recorded double-
digit grow th, reflecting stronger dom estic aggregate
dem and during the year. Excise duties receipts w ere
significantly higher due to continued high dem and for
m otor vehicles. It also reflected the upw ard revision of
excise duties on locally m anufactured cigarettes and
Table 2.8
Federal Government Revenue
2004 2005p 2004 2005p
RM m illion Annual change (% )
Tax revenue 72,050 80,594 11.0 11.9
% of GDP 16.0 16.3
D irect taxes 48,703 55,543 13.2 9.9
Companies 24,388 26,381 1.7 8.2
Petroleum 11,479 14,566 35.6 26.9
Individuals 8,977 8,649 12.4 -3.7
Stamp duties 2,381 2,460 18.6 3.3
Others 1,479 1,487 160.1 0.6
Indirect taxes 23,347 27,051 6.7 15.9
Export duties 1,600 2,085 38.4 30.3
Import duties 3,874 3,385 -1.1 -12.6
Excise duties 6,427 8,641 27.7 34.5
Sales tax 6,816 7,709 -14.4 13.1
Service tax 2,350 2,582 15.3 9.9
Others 2,280 2,648 29.1 16.2
Non-tax revenue 27,347 25,710 -1.3 -6.0
Total revenue 99,397 106,304 7.3 6.9
% of GDP 22.1 21.5
p Prelim inary
N ote: N um bers m ay not add up due to rounding.
Source: M inistry of Finance
Graph 2.9
p Prelim inary
RM billion
D ebt as
% of G D P
O verall balance as
% of G D P
Federal Government Debt
Federal Government Finance
-3.8%
46.2%
0
1994 1995 1996
D om estic debt
External debt
O verall balance
(RH S)
1997 1998 1999 2000 2001 2002 2003 2004 2005p
-80
-60
-40
-20
20
40
60
80
-8
-6
-4
-2
2
0
4
6
8
G ross developm ent expenditure
O perating expenditure
C urrent account
Revenue
-10
10
30
50
70
90
110
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 77
78
Total Revenue: RM106.3 billion
Graph 2.10
Composition of Federal Government Revenue, 2005 (% share)
N on-tax revenue
24.2%
O thers
3.8%
Individuals
8.1%
Im port duties
3.2%
Sales tax
7.3%
Excise duties
8.1%
Export duties
2.0%
O thers
2.4%
Service tax
2.4%
Petroleum
13.7%
C om panies
24.8%
Indirect taxes
25.4%
Direct taxes
50.4%
Summary of Major Tax Measures Implemented in 2005
Individuals Income Tax
Tax relief on contributions for EPF and insurance prem ium s increased to RM 6,000.
A dditional tax relief for disabled citizens and spouses increased to RM 6,000 and RM 3,500, respectively.
Tax rebate for purchases of com puters increased to RM 500.
Tax relief for purchases of books increased to RM 700.
Tax exem ption on retirem ent benefits of up to RM 6,000 for each year of service.
Companies Income Tax
Tax deduction for zakat on business incom e paid by com panies.
Tax exem ption on interest incom e from bonds received by non-resident com panies.
Tax incentives given to encourage the m odernisation and com m ercialisation of the agriculture sector.
Tax incentives extended for existing com panies for relocating m anufacturing activities to prom oted areas.
Scope of tax incentives extended for usage of renew able energy to com panies w hich generate such energy
for ow n consum ption.
D ouble deduction provided for expenses incurred on prom oting the export of professional services.
Indirect Tax
Im port duty for selected goods (surgical gloves, carpet, glassw are and sem i-finished com ponents for the
w ood-based industry) w as abolished.
Im port duty on selected raw m aterials for apparel industry and herbicides w as reduced betw een 5-30% .
5% exem ption given for im port duty on natural gas vehicles (N G V) conversion kits for vehicles.
Excise duty on cigarettes increased to RM 81 per 1,000 sticks.
Excise duty on liquor increased betw een 10 sen to RM 28 per litre.
Non-tax revenue
Road tax for m otorcycles w ith engine capacity betw een 151-250 cc reduced by 50% .
Road tax for passenger cars w ith engine capacity betw een 1,001-1,600 cc reduced by 50% , w hile those
below 1,000 cc the road tax w as charged at RM 30 per year.
Road tax for m ono gas and dual-fuel vehicles reduced by 50% and 25% , respectively.
10% exem ption given for road tax for vehicles w ith N G V conversion kits.
Road tax abolished for school and stage buses.
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 78
79
Monetary and Fiscal Developments
liquor announced in the 2005 Budget to prom ote a
healthy lifestyle and to curb social ills. M eanw hile, the
escalating oil prices contributed to the higher export
duties receipts. In line w ith M alaysias com m itm ent to
the A sean Free Trade A greem ent (A FTA ), the gradual
reduction in im port tariffs on C om plete Built-up (C BU )
m otor vehicles from A SEA N countries as w ell as the
reduction and abolishm ent of duties on selected goods
introduced in the 2005 Budget, resulted in low er im port
duties collection during the year.
C ollection from non-tax revenue declined by 6% in
2005 due to low er investm ent incom e. N evertheless, its
share to total revenue rem ained favourable at 24%
(2004: 27% ).
The Federal G overnm ents gross expenditure increased
by 6.8% to RM 128.3 billion in 2005. The overall thrust
of the Federal G overnm ents expenditure w as to
strengthen the fundam entals of the econom y and to
increase the private sectors resilience. In m anaging
expenditure, em phasis w as placed on enhancing
efficiency and cost effectiveness. Operating
expenditure w as higher by 7.1% or RM 6.4 billion in
2005. The substantially higher subsidies for petroleum
products (RM 11 billion), w hich w as m ore than three
tim es the am ount recorded in 2004, w as the m ajor
reason for the increase in operating expenditure. To
contain the grow th of operating expenditure w ithin a
reasonable range, the G overnm ent review ed policies on
petroleum subsidies. The prices of retail petroleum
products w ere raised three tim es during the year in view
of escalating oil prices. O n 1 M arch, the G overnm ent
raised the diesel price by 5 sen. The retail price of petrol
w as raised by 10 sen and diesel by 20 sen on 2 M ay and
31 July respectively.
The total w age bill, w hich w as the largest com ponent of
operating expenditure (26.2% ), rose by 7.6% . D uring the
year, the G overnm ent announced salary increases for
M em bers of Parliam ent and C abinet M inisters and higher
allow ances for various groups of civil servants, including
specialists, m edical officers and housem en w orking in
G overnm ent hospitals. H igher disbursem ent for supplies
and services w ere largely to im prove public sector delivery
and prom ote a culture of m aintenance. The bulk of the
spending w as for procurem ent of office supplies, repairs
and m aintenance as w ell as paym ents for professional
services associated w ith the G overnm ents initiative to
upgrade the quality and efficiency of public services.
Paym ents for grants and transfers to governm ent
agencies, statutory bodies and state governm ents w ere
extended for developm ent and m aintenance purposes.
N otw ithstanding the higher debt level, the debt service
charges w ere contained as new borrow ings w ere raised
at low er costs during the year.
Gross development expenditure increased by 5.8% to
RM 30.5 billion in 2005. The focus of developm ent
expenditure w as to enhance longer-term productivity and
com petitiveness, w hile supporting further econom ic
activity. Spending w as reprioritised to focus on sm aller-
sized projects that have m ultiplier effects in creating m ore
econom ic activities in the near term . In particular, such
spending w as directed to agriculture, construction,
housing and infrastructure activities in rural areas. During
the year, expenditure efficiency w as enhanced by ensuring
m axim um social and econom ic benefits. In addition,
further em phasis on the usage of the open tender system
w as undertaken to ensure com petitive pricing.
In term s of sectoral distribution, econom ic services
continued to be the largest com ponent of total
developm ent expenditure for the second consecutive year
w ith its share of total developm ent expenditure increasing
to 49% in 2005 from 35% in 2003. A large part of the
increase in spending for this sector w as directed to the
trade and industry sub-sector to facilitate grow th.
Spending w as focussed on strengthening the sm all and
m edium -sized enterprises, industrial research and
technological developm ent, and tourism developm ent
projects. Expenditure on the transport sub-sector w as also
higher, reflecting the G overnm ents concerted effort to
im prove the efficiency of public transportation services and
establishing an integrated national transportation netw ork.
Funding for agriculture and rural developm ent, as w ell as
public utilities (such as rural roads, w ater and electricity
Table 2.9
Federal Government Operating Expenditure by
Object
2004 2005p 2004 2005p
RM m illion % share
Em olum ent 23,779 25,587 26.0 26.2
Supplies and services 16,633 17,984 18.2 18.4
A sset acquisition 1,764 1,603 1.9 1.6
D ebt service charges 10,920 11,604 12.0 11.9
Pensions and gratuities 6,060 6,809 6.6 7.0
Subsidies 5,796 12,831 6.3 13.1
O ther grants and transfers
1
21,264 20,982 23.3 21.5
O ther expenditure
2
5,082 344 5.7 0.3
Total 91,298 97,744 100.0 100.0
% of GDP 20.3 19.8
1
Includes grants and transfers to state governm ents as w ell as public agencies
and enterprises.
2
Includes refunds, grants to international organisations, insurance claim s and
gratuities and others.
p Prelim inary
N ote: N um bers m ay not add up due to rounding.
Source: M inistry of Finance
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 79
80
Measures Taken to Cushion the Impact of Rising Oil Prices
Encourage the use of alternative energy sources
Provide m ore N G V pum ps at petrol stations.
Prom ote the use of N G V, especially by long-haul transport vehicles.
The use of renew able energy under the sm all renew able energy program m e.
D evelop Bakun hydroelectric pow er Project.
Introduce the use of "green" fuels, such as biodiesel, using palm oil.
Reduce public burden
The price of fuel for N G V w as fixed at half of the price of petrol.
50% and 25% road tax reduction for m ono gas and dual-fuel vehicles, respectively.
5% exem ption on im port duty and 10% on road tax on N G V conversion kits for vehicles.
Road tax abolished for school and stage buses.
Road tax for passenger cars w ith engine capacity betw een 1001-1600 cc reduced by 50% , w hile below
1000 cc the road tax is RM 30 per year.
Road tax for m otorcycles w ith engine capacity betw een 151-250 cc reduced by 50% .
D iesel subsidy provided to fisherm en.
Conserve the use of fuel
Energy conservation m oves introduced in G overnm ent offices, such as sw itching off lights during lunch
tim e and increasing room tem perature slightly.
Encourage the use of public transportation and car pooling.
Enhance efforts to im prove the public transportation system , especially in the Klang Valley.
program m es), w ere m ade to further m odernise and
com m ercialise the agricultural sector and im prove the
quality of life in rural areas.
In the social services sector, priority continued to be given
to the education sub-sector as focus w as placed on
hum an resource developm ent to support the strategy of
productivity-driven grow th. H ow ever, total education
expenditure w as low er, as m ost of the education projects
in the Eighth M alaysia Plan had been com pleted by 2003.
Expenditure for health services rem ained high to provide
better quality healthcare and m edical services. The
G overnm ent also continued to undertake housing
projects for public sector personnel and the low er incom e
groups. M eanw hile, general adm inistration spending w as
higher to im prove further the service delivery system , as
w ell as to enhance the w orking and service environm ent.
Expenditure w as channelled for the purchase of
inform ation and com m unications technology equipm ent
for the im plem entation of various initiatives under the
Electronic G overnm ent A pplication projects.
In an effort to cushion the im pact of high oil prices on
the dom estic econom y, the G overnm ent, throughout
2005, introduced several m easures aim ed at
encouraging the use of alternative energy sources to
reduce the heavy dependence on fossil fuels, low er the
cost burden on the general public and to encourage
energy conservation, especially by the G overnm ent
sector. A sum m ary of these m easures are listed in the
w hite box.
Table 2.10
Federal Government Development Expenditure by
Sector
2004 2005p 2004 2005p
RM m illion % share
D efence and security 4,133 4,803 14.3 15.7
Econom ic services 11,851 14,957 41.1 49.0
A griculture and rural
developm ent 2,881 2,495 10.0 8.2
Trade and industry 1,201 3,221 4.2 10.6
Transport 6,630 7,660 23.0 25.1
Public utilities 945 1,481 3.3 4.9
O thers 193 99 0.6 0.2
Social services 10,260 7,450 35.5 24.4
Education 4,316 3,736 15.0 12.2
H ealth 2,352 1,220 8.1 4.0
H ousing 1,593 1,082 5.5 3.5
O thers 1,999 1,412 6.9 4.7
G eneral adm inistration 2,620 3,325 9.1 10.9
Total 28,864 30,534 100.0 100.0
% of GDP 6.4 6.2
p Prelim inary
N ote: N um bers m ay not add up due to rounding.
Source: M inistry of Finance
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 80
81
Monetary and Fiscal Developments
External borrow ing w as lim ited to the draw dow n of
existing project loans com m itted earlier. A total of
RM 651 m illion w as disbursed from both bilateral and
m ultilateral sources. D uring the year, there w ere large
redem ptions of RM 4.2 billion, reflecting m ainly the
m aturity of the 650 m illion Euro Bond in N ovem ber.
O verall, the Federal G overnm ent recorded a sm aller
total net borrow ing of RM 9.2 billion in 2005. A s a
A s a prudent m easure, the Federal G overnm ent had
alw ays ensured that revenue exceeded operating
expenditure. G iven the reinforced fiscal prudence to
contain spending am idst higher revenue collection,
the G overnm ent registered a larger current account
surplus of RM 8.6 billion in 2005. The larger savings
enabled the G overnm ent to reduce its need to source
additional financing for developm ent activity. In
addition, a large part of the developm ent expenditure
w as financed from the draw dow n of accum ulated
assets. D uring the year, the G overnm ent drew dow n
RM 9.1 billion from its accum ulated assets. Financing
through issuances of governm ent securities w ere
reduced in 2005.
Total gross borrowings of the Federal G overnm ent in
2005 am ounted to RM 32.2 billion (2004: RM 47 billion).
The bulk of the funding (98% of total) w as raised from
dom estic sources w ithout "crow ding out" the private
sector, given the am ple liquidity situation in the
econom y. The G overnm ent raised a total of RM 27.5
billion by issuing M alaysian G overnm ent Securities
(M G S) and another RM 4 billion through G overnm ent
Investm ent Issues. In 2005, new issues of governm ent
securities w ere raised at low er costs reflecting low er
yields. N ew issues of governm ent securities w ith
m aturities of 3 and 5 years w ere issued at average yield
rates ranging betw een 3.1553.756% (2004: 3.135
4.546% ). For those w ith m aturities of 10 and 20 years,
the average yield rates ranged betw een 4.3914.837%
(2004: 5.0945.734% for m aturities of 10 and 15
years). In term s of the ow nership structure of M G S, the
provident and pension funds and insurance com panies
continued to be the m ajor holders.
Table 2.11
Federal Government Sources of Financing
2004 2005p
RM m illion
N et dom estic borrow ing 25,650 12,700
Gross borrowing 45,850 31,500
Less: Repayment 20,200 18,800
N et foreign borrow ing 121 -3,503
Gross borrowing 1,136 651
Less: Repayment 1,015 4,153
Special receipts 516 454
Realisable assets
1
and adjustm ents -6,868 9,073
Total 19,419 18,724
1
Includes changes in G overnm ents Trust Fund balances.
A positive (+) sign indicates a draw dow n in the accum ulated realisable assets.
p Prelim inary
N ote: N um bers m ay not add up due to rounding.
Source: M inistry of Finance
Table 2.12
Holdings of Federal Government Domestic Debt
2004 2005p 2004 2005p
N om inal value in
% share
RM m illion
Treasury Bills 4,320 4,320 100.0 100.0
Social security and insurance
institutions 17 82 0.4 1.9
Banking institutions 481 1,916 11.1 44.3
O thers 3,822 2,323 88.5 53.8
Government Investment
Issues 9,100 10,100 100.0 100.0
Social security and insurance
institutions 973 3,374 10.7 33.4
Banking institutions 6,755 4,146 74.2 41.0
O thers 1,372 2,581 15.1 25.6
Malaysian Government
Securities 154,350 166,050 100.0 100.0
Social security and insurance
institutions 109,402 115,109 70.9 69.3
of which:
Employees Provident Fund 91,426 96,571 59.2 58.2
Insurance companies 14,715 14,750 9.5 8.9
Banking institutions 23,427 25,123 15.2 15.1
O thers 21,520 25,817 13.9 15.5
p Prelim inary
N ote: N um bers m ay not add up due to rounding.
Total debt :
Domestic :
External :
Domestic debt
Graph 2.11
Federal Government Debt
as at end-2005p (% share)
p Prelim inary
G overnm ent Investm ent
Issues
4.4%
Treasury Bills
1.9%
External debt
accounted for only
13.1% of the total
Federal G overnm ent debt
H ousing Loans Fund
8.0%
RM228.7 billion
RM198.7 billion
RM30.0 billion
M alaysian
G overnm ent
Securities
72.6%
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 81
82
Table 2.13
Federal Government Debt Indicators
D om estic
1
External
1
Total D ebt
1
D ebt servicing
External debt
service ratio
(% of G D P) (% of revenue)
(% of operating
(% of G D P)
(% of exports of
expenditure) goods and services)
1985 52.6 29.7 82.4 23.9 26.9 6.5 6.7
1990 58.8 20.8 79.5 23.1 27.3 5.7 3.6
2000 31.1 5.5 36.6 14.6 16.0 2.6 1.2
2001 36.3 7.3 43.6 12.1 15.1 2.9 0.5
2002 35.5 10.0 45.6 11.6 14.1 2.7 1.0
2003 38.3 9.4 47.8 11.4 14.0 2.7 1.2
2004 40.5 7.7 48.2 11.0 12.0 2.4 0.5
2005p 40.2 6.1 46.2 10.9 11.9 2.3 1.0
1
Refers to end-period.
p Prelim inary
Source: M inistry of Finance
Table 2.14
Consolidated NFPEs Finance
1
2003 2004 2005e
RM m illion
Revenue 155,867 215,858 236,539
C urrent expenditure
2
113,900 155,137 171,732
Retained income 41,967 60,720 64,807
% of GDP 10.6 13.5 13.1
D evelopm ent expenditure 40,160 24,633 39,981
Overall balance 1,807 36,088 24,826
% of GDP 0.5 8.0 5.0
1
Refers to 30 N FPEs in 2004 and 2005; 34 in 2003.
2
Since year 2000, adjusted to include taxes and dividends paid to the G overnm ent.
e Estim ate
N ote: N um ber m ay not add up due to rounding.
Source: M inistry of Finance and non-financial public enterprises (N FPEs)
result, the Federal G overnm ent outstanding debt
expanded by a m odest rate of 5.6% to RM 228.7 billion.
N evertheless, the ratio of outstanding debt to G D P
im proved to 46.2% of G D P as at end-2005. This level of
debt rem ained m anageable w ith the debt servicing
expenditure sustained w ithin prudent levels. A ctive debt
m anagem ent also reduced bunching of repaym ents,
w ith about 60% of the debt having rem aining m aturity
of m ore than three years. The bulk of the loans of about
95% w ere raised at fixed rates, w hich reduced exposure
to increases in interest rates.
Based on prelim inary estim ates, the overall financial
position of the 30 non-financial public enterprises
(N FPEs) rem ained healthy in 2005. The consolidated
revenue of the N FPEs rose by 9.6% to RM 236.5 billion, as
a result of higher earnings of N FPEs involved in oil and
gas-related services and utilities sectors. These sectors
benefited from the pick-up in econom ic activities and
higher crude oil prices as w ell as better perform ance of
overseas operations.
Reflective of m easures undertaken by enterprises to
enhance operational efficiency and to contain the rising
operating costs, the N FPEs, as a group registered a
higher retained incom e of RM 64.8 billion. C urrent
expenditure rose by 10.7% reflecting largely higher
prices of raw m aterials and inputs, especially for crude
oil, natural gas and coal prices. C ost-cutting initiatives
undertaken by N FPEs included review ing processes,
im proving efficiency and perform ance, outsourcing,
centralising procurem ent, tightening credit control as
w ell as refinancing and prepaym ent of loans.
The higher capital outlay of N FPEs w as channelled
tow ards the expansion in capacity, enhancem ent of
productivity to im prove efficiency and quality of
services rendered to the public as w ell as higher
investm ents abroad to enhance their revenue-
generating capacity. The bulk of the developm ent
projects w ere undertaken by the larger N FPEs, such as
Petroliam N asional Berhad (PETRO N A S), Tenaga
N asional Berhad (TN B) and Telekom M alaysia Berhad
(TM ). D uring the year, PETRO N A S continued to invest
in the international arena w hile reinforcing its
established dom estic operations of both dow nstream
and upstream activities. A m ong the m ajor dom estic
projects undertaken by PETRO N A S and its subsidiaries
w ere the construction of new service stations,
debottlenecking project of M LN G 2 as w ell as
acquisition, upgrading and reconditioning of various
vessels by M ISC Berhad. M eanw hile, overseas
investm ents included exploration and production
projects in Egypt as w ell as developing a gas
processing plant in G hotki, Pakistan.
TN Bs capital expenditure w as largely concentrated
on the interconnection and upgrading of pow er
generation, transm ission and distribution netw orks.
M ajor expenditure incurred during the year included
the construction of Tuanku Jaafar Pow er Station
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 82
83
Monetary and Fiscal Developments
Table 2.15
Consolidated Public Sector Finance
2004 2005e 2006f
RM billion
Revenue
1
116.3 122.6 134.3
O perating expenditure 101.6 108.4 112.5
C urrent surplus of N FPEs
2
60.6 63.8 63.8
Current balance 75.3 78.0 85.6
% of GDP 16.7 15.8 15.8
N et developm ent expenditure
3
56.7 71.0 71.0
General government
4
32.1 31.0 39.4
NFPEs 24.6 40.0 31.5
Overall balance 18.5 7.0 14.7
% of GDP 4.1 1.4 2.7
1
Excludes transfers w ithin general governm ent.
2
Refers to 30 N FPEs in 2004 and 2005; 34 in 2003.
3
A djusted for transfers and net lending w ithin public sector.
4
C om prises Federal G overnm ent, state governm ents, statutory bodies and local
governm ents.
e Estim ate
f
Forecast
N ote: N um bers m ay not add up due to rounding.
Source: M inistry of Finance and non-financial public enterprises (N FPEs)
Phase 2 in Port D ickson, Paka Pow er Station
rehabilitation, Sabah East W est C oast grid
expansion and Supervisory C ontrol and D ata
A cquisition (SC A D A ) Phase 2 project. D uring the
year, TM focused on expanding and m odernising
telecom m unications infrastructure and netw orks
dom estically. It also expanded its global operations
through acquisitions of com panies in countries such
as Indonesia, G hana and Pakistan. M ajor projects
undertaken included the A sia Pacific C able N etw ork
2 and Internet Protocol D igital Subscriber Line
A ccess M ultiplexcer (IP D SLA M ).
The consolidated public sector financial position
rem ained strong in 2005. It recorded an overall
surplus of RM 7 billion or 1.4% of G D P (2004: 4.1%
of G D P). The overall surplus w as largely attributable
to the larger contribution from N FPEs, particularly
PETRO N A S as a result of higher crude oil prices.
C02 Monetary & Fiscal pg68-84 4/14/06, 13:57 83
C02 Monetary & Fiscal pg68-84 3/14/06, 9:13 PM 85
Outlook and Policy
The International Econom ic Environm ent
M alaysian Econom y in 2006
M onetary Policy in 2006
Fiscal Policy in 2006
White Box: Key Measures Announced in the
2006 Budget
Financial Sector Policy in 2006
86-92
92-98
98-99
99-100
100-101
101-105
86
THE INTERNATIONAL ECONOMIC ENVIRONMENT
Developments in 2005
In 2005, global econom ic expansion w as sustained at a
strong pace of 4.3% . G row th w as rem arkably resilient
against the backdrop of higher oil prices, rising interest
rates, large balance of paym ent im balances and
disruptions from natural disasters. W hile the econom ies
of the U nited States (U S) and PR C hina rem ained m ajor
drivers of global grow th, the recovery in Japan and the
euro area in the second half-year gained m om entum ,
providing additional support to the global econom y.
C onsum er spending w as sustained, reinforced to a
significant extent by w ealth effects, particularly from
robust housing m arkets in several m ajor econom ies.
Reflecting robust dem and conditions, stronger
corporate financial positions and rising capacity
utilization, investm ent spending expanded further.
M eanw hile, grow th in the A sian region strengthened in
the second half-year as the uptrend in the global
electronics cycle becam e evident. O verall, higher global
grow th w as reflected in the continued expansion in
w orld trade, w hich rose at a strong pace of 7% .
Strong global dem and w as also a key factor in driving
higher global com m odity prices in 2005. W hile the
relatively tight supply conditions and H urricane Katrina
drove oil prices to new peaks in the third quarter, the
strong grow th perform ance of the global econom y also
sustained dem and. O verall, global grow th exhibited
greater resilience to energy shocks, w ith the effects in
large part offset by productivity gains, continued incom e
grow th and w ealth creation in tandem w ith im proved
energy efficiency and technological im provem ents
during the recent tw o decades. H ence, w hile higher oil
and com m odity prices did have som e im pact on
headline inflation, the effect w as relatively m odest as
sustained im provem ents in productivity, the
globalisation of production and the em ergence of
com petitive sources of supply from several regions of
Table 3.1
World Economy: Key Economic Indicators
Real G D P G row th (% ) Inflation (% )
2004 2005e 2006f 2004 2005e 2006f
World Growth 5.1 4.3 4.3
World Trade 10.3 7.0 7.4
Major Industrial Countries 3.3 2.6 2.6 2.0 2.2 2.0
U nited States 4.2 3.5 3.3 2.7 3.4 2.8
Japan 2.3 2.8 2.5 0.0 -0.3 0.0
Euro area 2.1 1.3 1.7 2.1 2.2 1.8
United Kingdom
1
3.2 1.8 2.0 1.3 2.1 1.9
East Asia 7.9 7.2 7.0 ~ 7.2 3.4 3.1 3.3 ~ 3.6
Asian NIEs 6.0 4.8 4.6 ~ 4.9 2.3 2.2 2.3 ~ 2.4
Korea 4.6 4.0 5.0 3.6 2.7 3.0
C hinese Taipei 6.1 4.1 4.3 1.6 2.3 1.7
Singapore 8.7 6.4 4.0 ~ 6.0 1.7 0.5 0.5 ~ 1.5
H ong Kong C hina
2
8.6 7.3 4.0 ~ 5.0 -0.4 1.1 2.3
The Peoples Republic of China 10.1 9.9 9.4 3.9 1.8 3.0
ASEAN
3
6.4 5.4 5.1 ~ 5.9 3.8 5.9 4.8 ~ 6.0
M alaysia 7.1 5.3 6.0 1.4 3.0 3.5 ~ 4.0
Thailand 6.2 4.5 4.8 ~ 5.8 2.7 4.6 3.5 ~ 5.0
Indonesia 5.1 5.6 5.0 ~ 5.7 6.1 10.4 7.0 ~ 9.0
Philippines 6.0 5.1 5.7 ~ 6.3 6.0 7.6 8.0 ~ 8.5
1
Based on Eurostats harm onized index of consum er prices.
2
Inflation refers to com posite prices.
3
Includes Singapore.
e Estim ate
f Forecast
Source: International M onetary Fund, D atastream , O EC D Econom ic O utlook, N ational Sources
Outlook and Policy
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 86
87
Outlook and Policy
the w orld helped to m itigate the pass-through effects.
The relatively restrained inflationary environm ent
allow ed m onetary authorities across the w orld to raise
interest rates at a gradual and m easured pace. Financial
m arket activity generally benefited from the abundant
liquidity conditions and sustained econom ic grow th.
Reflecting prospects for ongoing econom ic recovery and
im proved corporate perform ance, equity m arkets in
Japan and Europe recorded strong gains. M eanw hile,
rising interest rates in the U S supported the U S dollar
against the other m ajor currencies.
A m ong the m ajor industrial countries, the US
continued to lead grow th in 2005. G row th w as
broad based, w ith strong m om entum in dom estic
dem and, ow ing significantly to the strong
contribution from consum ption spending,
underpinned by the buoyant housing m arket. In
addition, im proving labour m arket conditions
provided further stim ulus to consum er spending.
Strong corporate financial positions, housing-related
investm ent spending and a tax m easure to
encourage repatriation of funds provided im petus
for a further expansion in private investm ent activity.
D espite the im pact of the hurricanes in the G ulf
C oast and record gasoline prices, U S econom ic
perform ance rem ained resilient in the second half-
year. C onsum er confidence, labour m arkets and
business activity rebounded shortly after the im pact
of H urricane Katrina. In the governm ent sector, the
fiscal deficit im proved on higher tax revenue and
som e expenditure reduction. H ow ever, strong
dom estic dem and com bined w ith high oil prices led
to a further w idening of the current account deficit.
Econom ic recovery in Japan w as evident throughout
the course of 2005, underpinned by stronger dom estic
dem and and reinforced by external dem and in the
later part of the year. D om estic dem and in Japan w as
m ainly supported by an expansion in investm ent w hile
recovery in consum ption w as underpinned by
favourable developm ents in labour m arket conditions.
M eanw hile, export perform ance picked up in the
second-half year, in line w ith the pick-up in the global
electronics cycle.
Econom ic recovery in the euro area w as significantly
stronger in the second half of 2005, supported largely
by stronger exports. This led to a m odest increase in
investm ent spending w hile industrial production
gathered m om entum . A lthough business confidence,
as reflected by the G erm an Ifo and ZEW indicators,
im proved m arkedly tow ards the end of 2005,
consum er sentim ents rem ained w eak, reflecting a
persistently high level of unem ploym ent. N onetheless,
labour reform s have show n som e results in term s of
im proving labour m arket flexibility as seen in the rising
level of part-tim e and contract em ploym ent.
M eanw hile, grow th in the UK slow ed in 2005 as both
consum ers and firm s held back on consum ption and
investm ent spending am idst w eaker dom estic
conditions follow ing the slow er housing m arket.
In the Asian region, grow th rem ained strong at 7.2% in
2005 follow ing a m ilder-than-expected slow dow n in the
electronics sector. G row th, nevertheless, m oderated
slightly from the high base of 7.9% in 2004 in the face of
surging oil prices, m onetary tightening cycle and som e
slow dow n in global IT dem and. PR C hina continued to
drive regional expansion w ith a revised grow th estim ate
of 9.9% . Regional grow th w as broad based,
underpinned by both external and dom estic dem and.
In 2005, exports grew by 20% (2004: 28.5% ). After som e
slow ing dow n in the first half-year, export perform ance
picked up in the second half-year as the global technology
cycle revived. Private consum ption continued to grow at a
stable pace in the region, w ith rising incom es offsetting the
im pact of higher oil prices and tighter m onetary policies. In
Korea, private consum ption increased steadily, follow ing
the strengthening of household balance sheets since the
burst of the credit bubble in 2002. Fixed investm ent, on
the other hand, grew at a m ore m odest pace in several of
the regional econom ies. How ever, fixed investm ent in PR
China continued to grow strongly despite m easures by the
authorities to m oderate overheating in selected sectors.
The current account surplus in the region rem ained
strong but show ed divergent trends. The surplus w as
significantly larger in PR C hina, reflecting continued
strong exports but narrow ed in a num ber of regional
countries due partly to the im pact of high oil prices.
This, together w ith trends in capital flow s, led to a
m oderation in the pace of accum ulation in foreign
reserves in the second half of the year.
Prospects for 2006
G oing forw ard, the outlook for 2006 is for global
expansion to rem ain positive. W orld output and w orld
trade are projected to expand at a firm pace of 4.3%
and 7.4% respectively in 2006. G lobal grow th is
expected to broaden across the m ajor econom ies,
w ith the econom ies of Japan and Europe playing a
m ore significant role. A nother notable feature is the
stronger investm ent uptrend seen in several m ajor
econom ies. For the A sian region, the global
electronics up-cycle is expected to strengthen further
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 87
88
follow ing higher IC T-related spending in the industrial
econom ies and stronger intra-regional dem and. W hile
m onetary stim ulus has been reduced due to increased
interest rates, m onetary conditions continue to
rem ain accom m odative to grow th.
2005 is expected to continue this year. M eanw hile, the
continued recovery in the dom estic econom y is also
reflected in im provem ents in the health of the banking
sector as w ell as the asset m arkets.
In the euro area, econom ic recovery in G erm any, France,
Italy and Spain are expected to pick up pace in 2006.
W ith Italy em erging from its recessionary conditions and
grow th in G erm any and France strengthening further,
real G D P as a w hole is expected to expand by 1.7% .
N onetheless, recovery particularly in G erm any, w hich
accounts for alm ost 30% of the euro areas G D P
continues to be supported prim arily by external dem and
as the grow th in private dom estic consum ption rem ains
m odest. W hile business sentim ents have im proved, w eak
consum er sentim ents coupled w ith a persistently high
unem ploym ent level m ay constrain prospects for stronger
dom estic grow th in the euro area.
In the UK, real G D P grow th is expected to rem ain
m odest, projected to expand by 2% in 2006. H ousehold
consum ption is expected to rem ain subdued as
household debts have reached record levels and the
w ealth effect from rising house prices has tapered off.
G overnm ent spending, though expected to m oderate in
2006, w ill continue to support econom ic expansion in
the U K as private sector investm ent rem ains cautious
despite strong corporate profitability. H ow ever, as
recovery in the euro area picks up, the U K is expected to
benefit as exports, w hich are largely channelled into the
euro area, start to recover.
U S Japan Euro area U K
2006f 2005e
Graph 3.1
Major Industrial Countries: Real GDP Growth
(2005-2006)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
3.5
3.3
2.8
2.5
1.3
1.7
1.8
2.0
4.0
A nnual change (% )
e Estim ate
f Forecast
The global economy is
expected to expand at a
strong pace of 4.3% in 2006,
emanating from a more
balanced growth across major
industrial countries. Growth
will be supported by an
uptrend in investment and
electronics cycle as well as
continued favourable liquidity
conditions.
Industrial Countries
In 2006, the US econom y is expected to sustain the
grow th m om entum from 2005, w ith real G D P expanding
by 3.3% . Investm ent is expected to em erge as a stronger
driver of grow th. Strong corporate positions, rising
capacity utilisation and lean inventory levels are expected
to further spur capital expenditure, especially for
spending related to IC T upgrading and replacem ent as
w ell as in the energy sector for post-Katrina rebuilding.
M eanw hile, despite expectations for a slight m oderation
due to a cooler housing m arket, U S consum er spending
w ould continue to expand as job creation and incom e
grow th are expected to strengthen further in 2006. O n
the fiscal front, spending on post-hurricane
reconstruction is also expected to provide further stim ulus
to the U S econom y. The large U S current account deficit
is, how ever, expected to w iden further, exacerbated by
high oil prices, sustained dom estic dem and and higher
interest paym ent outflow s.
In Japan, econom ic recovery is expected to rem ain
intact, w ith grow th sustained above 2% for a third
consecutive year in 2006. D om estic dem and w ould
rem ain the driver of grow th, led by investm ent and
accom panied by sustained expansion in private
consum ption. The expansion in private consum ption
w ould be supported by stronger im provem ents in
em ploym ent, w age and incom e conditions, despite
constraints due to a planned reduction in individual tax
allow ances and a rise in pension contributions. Recovery
in exports to the m ajor m arkets since the second half of
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 88
89
Outlook and Policy
W hile global grow th is expected to be sustained at a
steady pace in 2006, several risks could adversely affect
the outlook. The risk of a sharp and prolonged spike in oil
prices rem ains a concern as the supply-dem and balance
tightens further and geopolitical uncertainties persist, but
high oil prices alone are not expected to destabilize
grow th. A prolonged and sustained rise in inflation,
possibly resulting from a further surge in oil prices, could
lead to sharply higher global interest rates. In the financial
m arkets, a disorderly realignm ent of the m ajor currencies
could dam pen trade and investm ent flow s. How ever, thus
far, the international financial system and m arkets have
show n an im proved capacity for orderly recycling of capital
flow s. In addition to these concerns, the spread of avian flu
could also alter the global and regional prospects.
Nevertheless, follow ing the experience w ith SARS, regional
countries are better prepared in coping w ith the threat.
East Asian Economies
In line w ith the expected pick-up in w orld trade and
continued favourable global environm ent, the
projection is for grow th in the East A sian region to be
sustained at a strong pace of 7.0-7.2% . G row th w ill be
supported by the recovery in the electronics sector and
continued strength in dom estic dem and. PR C hinas
grow th is expected to rem ain strong based on the
favourable export sector and governm ent m easures to
rebalance grow th by prom oting rural developm ent and
private consum ption. G row th in the other A sian
countries is also projected to im prove follow ing a m ore
positive outlook of the export sector, strengthening
fundam entals and prospects for higher investm ent.
In the external sector, the global electronics cycle is
expected to trend upw ards after reaching its trough
in m id-2005, sustaining a stronger grow th in
regional exports. The recovery is expected to be
broad based, em anating from stronger dem and for
m ajor end-products such as consum er electronics,
PC s, m obile phones and display devices. Sim ilarly,
regional trade is poised to gain from a firm er
recovery and increasing openness of the dom estic
m arket in Japan.
In the dom estic sector, aggregate dem and rem ains
stable, underpinned by favourable econom ic
fundam entals am id continued strong grow th. The rise
of a younger generation w ith high discretionary
spending pow er and strong taste for consum er
electronic gadgets w ill drive consum ption further.
Private dem and w ill also benefit from the rise of a
m odern retail sector characterized by large global retail
giants in response to changing spending patterns. O ther
positive developm ents include the huge potential in
tourism follow ing rising incom e, large untapped
m arkets, notably PR C hina and India as w ell as the
proliferation of budget airlines. For som e countries,
rising w orker rem ittances have been positive in
supporting spending, reducing poverty and facilitating
developm ent in hom e countries. W hile investm ent rates
in m any countries rem ain low , recent signs suggest a
pick-up in investm ent trends. These include high
capacity utilisation, grow th in im port of capital goods,
investm ent plans to increase infrastructure spending,
revival of the property sector and continued FD I inflow s.
In 2006, the Asian Newly Industrialized Economies
(NIEs) as a group is projected to record a real G D P
grow th of 4.6-4.9% , supported by continued strength in
dom estic dem and and stronger exports. Export grow th is
expected to strengthen in response to further recovery in
the global electronics sector.
The PR China w ill continue to drive grow th in the
region, w ith an expected real G D P grow th of 9.4% in
A robust growth of 7.0-7.2% is
projected for the East Asian
economy, based on a stronger
recovery in the global
electronics cycle and
continued strength in
domestic demand.
5.3
5.0 ~ 5.7
5.6
5.7 ~ 6.3
5.1
4.8 ~ 5.8
4.5
4.0 ~ 6.0
6.4
4.3
4.1
4.0 ~5.0
7.3
5.0
4.0
9.4
9.9
6.0
2006f 2005e
Graph 3.2
Regional Countries: Real GDP Growth
e Estim ate
f Forecast
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
PR C hina
Korea
H ong Kong C hina
C hinese Taipei
Singapore
Thailand
Philippines
Indonesia
M alaysia
A nnual change (% )
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 89
90
2006. W hile exports w ill rem ain a key driver, dom estic
dem and w ill play an increasing role in the econom y. In
particular, favourable tax policies such as incom e tax
reform and rem oval of agriculture tax, and other
supportive m easures are expected to boost consum ption.
Furtherm ore, rural developm ent is projected to
accelerate, w ith the im plem entation of PR C hinas 11th
Five-Year Program m e beginning in 2006. H ow ever,
concern rem ains over a rebound in the grow th of fixed
asset investm ents and an overcapacity in several sectors,
despite policy-cooling m easures.
In Korea, real G D P is projected to expand at a
stronger rate of 5% in 2006. Econom ic expansion is
expected to be propelled by exports and the revival of
dom estic dem and. Recovery in private consum ption is
expected to continue, benefiting from further
progress in restructuring of household balance sheets,
positive w ealth effects from a rising stock m arket and
strengthening consum er confidence.
G row th is forecast to be at 4 - 5% in Hong Kong SAR,
led by exports and private consum ption. A strong labour
m arket and rising w ages as w ell as an im proving
housing m arket are expected to underpin consum er
spending, m itigating the negative im pact of higher
interest rates. M eanw hile, Chinese Taipeis real G D P
grow th is expected to pick up to 4.3% , reflecting higher
exports and steady dom estic consum ption. Export
perform ance w ill likely im prove in 2006 due to an
upturn in the technology sector and the continuing
strength of U S and C hinese dem and.
In Singapore, grow th is expected to reach 4 - 6% ,
supported by strong global dem and for electronics and
an im provem ent in the labour m arket, higher asset prices
and sustained tourist arrivals. In term s of industrial origin,
the m anufacturing sector is projected to be boosted by
new capacity com ing onstream in the pharm aceutical
industry. The building of the integrated resorts, new
financial centre and the revam p of shopping areas are
expected to spur grow th in construction activity, its first
expansion in seven years.
The ASEAN-4
1
econom ies as a group are expected to
grow by 5.3 5.9% in 2006. G row th in Indonesia is
expected to m oderate slightly w ithin the range of 5
5.7% . C onsum er spending w ill rem ain supported by
stable em ploym ent and rising disposable incom e am id
higher inflation and interest rates. A nother key grow th
factor is the pick-up in investm ent, follow ing m easures
to support infrastructure spending and continued
progress in reform s in the regulatory fram ew ork and
tax law to im prove the investm ent clim ate. In
Thailand, real G D P grow th is expected to rem ain
around 4.8 5.8% . Econom ic expansion w ill be
supported by the recovery of the global electronics
industry, together w ith prospects of higher agricultural
exports follow ing im proved w eather conditions and a
recovery in tourism . M eanw hile, investm ent is also
expected to pick up w ith the im plem entation of m ega
projects over the next few years. M eanw hile, real G D P
grow th in the Philippines is projected to expand by
5.7 6.3% . A gricultural output is expected to recover
from the droughts last year, w hile private consum ption
is expected to be sustained by strong inflow s of
rem ittances from overseas w orkers. The fiscal gap is
projected to narrow further to 2.2% of G D P in 2006
follow ing the introduction of the expanded value-
added tax.
W hile high oil prices rem ain a concern, its im pact
thus far on the region has been m odest. H ow ever,
inflationary pressures rem ain due to the potential
pass-through from stronger producer price index (PPI)
especially in the A SEA N countries. In addition, despite
som e recent price increases, the pass-through from
higher oil prices rem ains incom plete in a num ber of
regional countries that offer fuel subsidies.
The grow th outlook in 2006 is also subject to the
risk of an avian flu pandem ic. The overall econom ic
im pact is expected to be sm all if the epidem ic is
contained, as the poultry sector accounts for a sm all
share of G D P in the affected countries. H ow ever,
there are concerns that the strain of flu m ight
m utate into a form in w hich hum an-to-hum an
transm ission occurs and cause hum an casualties and
other econom ic costs. Its im pact on regional grow th
could be significantly greater than Severe A cute
Respiratory Syndrom e (SA RS) in view of the higher
m ortality rate and the prevalence across w ider
geographical areas. In the event of a pandem ic,
countries w ith higher degree of trade openness,
dependence on tourism as w ell as population
density w ill be m ost affected.
Interest Rates and Exchange Rates
In 2005, monetary policy in the m ajor industrial
countries rem ained accom m odative. In view of
sustained econom ic grow th and an upturn in inflation
caused prim arily by higher energy prices, several
central banks initiated consecutive increases in interest
rates from low levels tow ards a m ore neutral stance.
In the U S, against the backdrop of robust grow th and
concern on inflationary pressures, the US Federal
1
Refers to Indonesia, Thailand, M alaysia and the Philippines.
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 90
91
Outlook and Policy
Reserve Board (Fed) raised interest rates eight tim es
by 25 basis points each tim e during the year, bringing
the Fed funds rate to 4.25% by year-end. In its
D ecem ber statem ent, the Fed dropped the often
repeated phrase 'accom m odative' in its policy
statem ent, thus signaling that rates have risen closer to
neutral levels from the low of 1% since m id-2004. In
the euro area, the European Central Bank raised
interest rates by 25 basis points to 2.25% in D ecem ber
2005 am id expansions in the m oney supply and credit
grow th to the private sector. In contrast, in the U K,
slow er consum er spending am id a w eaker housing
m arket led the Bank of England to low er interest rates
in A ugust 2005 by 25 basis points to 4.50% .
Throughout 2005, w ith official short-term interest rates
(uncollateralized overnight call rate) in Japan at around
zero percent, the Bank of Japan (BOJ) continued to use
quantitative easing m easures, introduced five years ago, to
inject liquidity into the banking system in order to counter
deflationary pressures. As at end-2005, the quantitative
easing target for current account balances of the
com m ercial banks and financial institutions held at the BO J
stood betw een 3035 trillion yen (2001: 6 trillion yen).
D uring the year, regional countries have raised interest
rates broadly in line w ith global developm ents. W hile
rate hikes vary across countries, the m oves w ere aim ed
at containing inflationary pressures and lim iting
second-round effects in the face of rising oil prices as
w ell as rem oval of fuel subsidies. C ountries that have
raised rates include Indonesia, Thailand, India,
Philippines and C hinese Taipei w hile Singapore
m aintained its policy of a `m odest and gradual
appreciationof the Singapore dollar.
In 2006, the tim ing and m agnitude of m onetary policy
actions w ould depend on country-specific factors,
including the strength of econom ic grow th, inflationary
expectations, m ovem ents in exchange rates and the
perform ance of the financial m arkets.
In the foreign exchange m arkets, during the course of
2005, the US dollar appreciated strongly against three
m ajor currencies, notably the euro, pound sterling and yen,
reversing the depreciation recorded in 2004. The m ain
factors that contributed to the US dollar strength w ere the
yield differentials in favour of the US dollar and the
relatively stronger econom ic perform ance in the US.
O verall, m easured on a trade-w eighted basis
2
, the US
dollar appreciated by 3.5% in 2005. Specifically, the
appreciation w as m ost prom inent against the euro (10% ),
pound sterling (13% ) and the yen (13% ). The double-digit
2001 2000 1999 2002 2003 2004 2006 2005
Graph 3.3
Major Industrial Countries: Official Interest Rates
Rate, %
0
1
2
3
4
5
6
7
U nited Kingdom
(Base lending rate)
U nited States
(Fed funds rate)
Japan
(O vernight rate)
Euro area
(Refinancing rate)
2.50
4.50
0.0
4.50
rate of appreciation recorded by the US dollar against the
three m ajor currencies w as the strongest since 1999.
Against the backdrop of a stronger US dollar, the euro
ended the year at E1=USD1.1849 w hile the yen ended the
year at USD1=117.75. The depreciation of the yen w as
also further affected by the strong resident outflow s
follow ing increased risk appetite for foreign financial assets
as investorsconfidence rose w ith continued recovery in
the Japanese econom y.
In the A sian region, w hile the exchange rate
perform ance w as m ixed, regional currencies continued
to display increased flexibility against the U S dollar.
A m ong regional currencies, the Philippine peso recorded
the strongest appreciation of 6% against the U S dollar,
supported by record inflow s of rem ittances and an
im provem ent in the countrys fiscal position. The Korean
1999 2000 2001 2002 2003 2004 2006 2005
Euro, Sterling Yen
Graph 3.4
Movement of the US Dollar against
Major Currencies
U SD /
U SD /Euro
/U SD
0.80
1.00
1.20
1.40
1.60
1.80
2.00
100
105
110
115
120
125
130
135
140
2
U S Federal Reserve Boards broad nom inal index.
C03 Outlook & Policy pg86-106 4/14/06, 12:02 91
92
w on and the RM B appreciated by about 2.6% and
2.5% against the U S dollar respectively. For the RM B,
after the initial 2.1% appreciation follow ing the change
in the exchange rate regim e, the RM B gained a further
0.5% . The other regional currencies, how ever,
depreciated against the U S dollar, w ith the Indonesian
rupiah recording the largest depreciation of 6% .
In 2006, the m ovem ent of the U S dollar against the
three m ajor currencies is expected to be driven by a
num ber of factors. These include investorsperception
on interest rate differentials and grow th perform ance,
the path of adjustm ent of global im balances,
perform ance of the equity and bond m arkets, and
global asset reallocation am ong the m ajor currencies.
In addition, country-specific issues that relate to
inflationary trends and geo-political risk prem ium s
could also affect sentim ents on the m ajor currencies.
MALAYSIAN ECONOMY IN 2006
The M alaysian econom y is expected to strengthen further
in 2006. Real G D P is projected to grow at a faster rate of
6% , driven by strengthening exports and resilient
dom estic dem and. The global sem iconductor upcycle,
sustained global grow th and higher prices for prim ary
com m odities are expected to have positive effects on
exports, as w ell as private consum ption and investm ent.
sustainability of grow th by expanding the stock of
productive capital. In this regard, efforts w ill be
intensified to enhance the contribution of private
investm ent to grow th.
The G overnm ent w ill continue to focus on
strengthening the fiscal position w ith the ultim ate aim
of supporting econom ic grow th w ithout com prom ising
long-term fiscal sustainability. In 2006, prices are
expected to increase, driven largely by cost-push factors.
N evertheless, inflation is expected to rem ain at
m anageable levels during the year as capacity expansion
and productivity im provem ents in the dom estic
econom y w ill help contain price pressures. M onetary
policy w ill, therefore, rem ain supportive of grow th.
W hile dow nside risks rem ain, the strong
m acroeconom ic fundam entals and diversified econom ic
structure w ill provide econom ic resilience.
Domestic Demand
The factors that supported dom estic dem and in 2005 are
expected to continue to provide further stim ulus in 2006.
Aggregate dom estic dem and is projected to increase further,
by 5.9% in 2006, w ith private sector expenditure rem aining
the m ain driving force. Private consumption is expected to
increase by 6.8% , exceeding the overall grow th rate for the
seventh consecutive year. Consum ers are expected to
benefit from higher incom e follow ing the expected
im provem ent in the econom y and em ploym ent conditions,
as w ell as higher prim ary com m odity prices. W hile interest
rates have risen, the ability of households to borrow has not
been im paired as rates continue to rem ain at low levels.
Further, although household debt has been on an increasing
trend, the ability of the household sector to service its debt
rem ains sustainable am idst continued grow th in household
disposable incom e. M alaysias relatively large young w orking
population w ith higher propensity to consum e w ill further
underpin consum er dem and. Therefore, consum ption
grow th is expected to be driven m ainly by incom e grow th
and dem ographic factors, w ith credit conditions playing a
supportive role. Notw ithstanding the sustained high
consum ption grow th, M alaysias nom inal private
consum ption-to-G DP ratio (43.7% ) continues to be one of
the low est in the w orld. These indicators point to sustained
increases in private consum ption.
W hile private consum ption is an im portant source of
grow th in dom estic dem and, private investment is
playing an increasingly strong supportive role in
sustaining econom ic grow th over the longer term . In
2006, favourable external and dom estic dem and w ould
provide the im petus for private investm ent to grow by
10% . G iven the steady im provem ent in corporate
balance sheets, firm s w ould continue to be able to fund
Growth is expected to
strengthen further in 2006.
Underpinned by strengthening
exports and resilient domestic
demand, real GDP is forecast to
expand at a faster rate of 6%.
The private sector would provide
the main impetus to growth for
the fourth consecutive year.
C urrent indicators suggest that the upturn in the global
sem iconductor industry, w hich began in the second half
of 2005, w ould gain m om entum in 2006. M alaysia is
expected to benefit from this favourable developm ent
w ith a stronger grow th in m anufactured exports,
particularly in the com puter and sem iconductor
segm ents. D om estic dem and w ould be driven by the
private sector for the fourth consecutive year as
household spending rem ains an im portant source of
grow th. Equally significant, the continued expansion in
private investm ent w ould ensure the long-term
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 92
93
Outlook and Policy
their investm ent activities by using internally generated
funds. In addition, conditions in the financial m arkets
continue to rem ain conducive for firm s to use leverage
or tap the capital m arket to fund their investm ents. In
view of the long-term im portance of private investm ent,
efforts have been undertaken to further enhance the
contribution of private investm ent to grow th. The
G overnm ent continues to place em phasis on im proving
the public sector delivery system and has taken
m easures to reduce cost of doing business. Investm ent
incentives are custom ised to attract investm ent from
high technology and know ledge-intensive industries,
particularly in the new grow th areas w ithin the
agriculture, m anufacturing and services sectors. G reater
em phasis has also been given to hum an resource
developm ent to m eet the requirem ents of these new
industries. Recognising the increasingly com petitive
global environm ent, the G overnm ent has also
intensified the prom otion of dom estic investm ent,
particularly investm ent by the SM Es.
Private investm ent grow th is expected to be broad-based
in 2006, w ith the bulk of the expenditure expected in the
m anufacturing and services sectors as w ell as in the oil
and gas industry. C apital spending in the m anufacturing
sector, w hich accounts for a third of total private
investm ent, is expected to register a strong grow th,
supported by the upturn in the sem iconductor industry
and the high capacity utilisation in the sector.
M anufacturing firm s, particularly from the E& E and
chem ical and chem ical products industries, are expected
to raise investm ent to im prove efficiency and increase
productivity to m eet the stronger dem and. In addition,
the G overnm ents em phasis on high technology and
higher-skilled projects is expected to increase investm ent
in high value-added projects. The sustained high capital
intensity ratio of m anufacturing projects approved in
these recent three years, w hich averaged RM 324,136
(2000-2002: average of RM 315,249), is reflective of this
continuous shift tow ards higher value-added production.
In the services sector, stronger investm ent is expected
from the telecom m unications, transportation and utilities
sub-sectors. In the telecom m unications sub-sector, private
cellular operators are expected to continue investing to
enhance netw ork capacity and to intensify provision of
broadband facilities due to the expected rise in dem and
for 3G services. M eanw hile, capital expenditure in the
transport services industry is also expected to increase,
m ainly due to the continuation of the airlinesfleet
expansion program m es and the developm ent of port
facilities. In the utilities sector, capital expenditure is
While private consumption
remains an important source
of growth in domestic
demand, growth in private
investment will be broad-
based, across most sectors of
the economy.
Table 3.2
Real GDP by Expenditure (1987=100)
2005p 2006f 2005p 2006f
A nnual change C ontribution to real G D P grow th
(% ) (percentage point)
Domestic demand
1
7.3 5.9 6.6 5.5
Private sector expenditure 9.5 7.4 5.7 4.6
Consumption 9.2 6.8 4.5 3.4
Investment 10.8 10.0 1.2 1.2
Public sector expenditure 3.1 3.0 0.9 0.9
Consumption 5.9 3.2 0.9 0.5
Investment 0.4 2.7 0.1 0.4
Change in stocks -2.9 1.0
Net exports of goods and services 19.3 -5.4 1.5 -0.5
Exports 8.4 8.9 9.8 10.7
Im ports 7.6 10.0 8.3 11.2
Real Gross Domestic Product 5.3 6.0 5.3 6.0
N ote: Figures m ay not necessarily add up due to rounding.
1
Excluding stocks.
p Prelim inary
f Forecast
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 93
94
expected to rem ain high due to the ongoing
im provem ent of w ater treatm ent and distribution plants
as w ell as the developm ent of pow er plants, w hich w ill
com e on stream w ithin the next tw o years.
Investm ent in the m ining sector is expected to increase
strongly, attributable to higher capital spending by the
private oil com panies operating in M alaysia. W hile
spending on exploration and survey are m ainly led by the
com panies involved in deepw ater and ultra deepw ater
discoveries, com panies involved in non-deepw ater
discoveries are m oving from exploration activities to
developm ent activities and the setting up of production
facilities. M eanw hile, capital expenditure in the
construction sector w ill be supported by the ongoing
construction of privatised roads and residential projects.
In 2006, a m odest increase in public sector expenditure
is expected w hen the im plem entation of the N inth
M alaysia Plan com m ences in A pril 2006. Public
consumption is expected to increase m oderately by
3.2% , due m ainly to higher expenditures on supplies
and services to further im prove the public sector delivery
system to support private sector activities. Prudent
expenditure m anagem ent by the G overnm ent has
provided the flexibility to focus on developm ental efforts
in both the rural and urban areas. The largest allocation
of developm ent expenditure in 2006 has been for the
econom ic sector, nam ely the developm ent and
im provem ent of agriculture, industry and infrastructure
sectors, to achieve balanced and com prehensive
econom ic developm ent. M eanw hile, the provision of
better essential services, such as education, healthcare
and housing, rem ains the m ain agenda of developm ent
in the social sector. The capital outlays by the N FPEs are
expected to increase further in 2006, albeit at a slow er
rate, follow ing the strong expansion a year earlier. The
bulk of the capital spending w ould be undertaken by
the three largest N FPEs, nam ely Petroliam N asional
Berhad (PETRO N A S), Tenaga N asional Berhad (TN B) and
Telekom M alaysia Berhad (TM ). W ith new discoveries of
oil and gas fields in recent years and new production
sharing contracts signed, PETRO N A Scapital outlays
continue to be dom inated by its upstream investm ent
activities. Im provem ent and expansion of
telecom m unication infrastructure and pow er generation
and distribution w ould be the m ain investm ent activities
for TM and TN B respectively. A s a result, public
investment is projected to increase by 2.7% .
Sectoral Outlook
O n the supply side, grow th in 2006 is expected to be
broad based and balanced, supported by expansion in all
sectors of the econom y, including construction. A bout
5.7 percentage points of the 6% G D P grow th w ould
em anate from the tw o key sectors, nam ely the
m anufacturing and services sectors, w hich account for
about 90% of the econom y. G row th in the
m anufacturing sector is expected to strengthen in line
w ith the upturn in the global sem iconductor cycle, w hile
the services sector is expected to sustain its strong
perform ance supported by higher trade-related activities,
and continued increase in consum ption and business
activities. The com m odities sector is expected to see a
m ore broad-based grow th, w ith im provem ents in the
production of rubber, crude oil and the other agriculture
segm ents, w hile crude palm oil output consolidates after
three years of strong perform ance. The construction
sector is expected to register a positive grow th in line
w ith the im provem ent in the civil engineering segm ent.
Growth in 2006 is expected to
be broad-based and balanced,
supported by expansion in all
economic sectors, including
construction.
Value-added grow th in the manufacturing sector is
expected to strengthen to 7% in 2006 (2005: 4.9% ).
The grow th w ould be led by the electronics and
electrical (E& E) segm ent, and further reinforced by the
strong external dem and for resource-based products
such as chem ical, petroleum , and rubber products. In
the dom estic-oriented industries, the im provem ent in
the construction-related industries w ould further lend
support to the expansion of the sector.
In the E&E sector, the latest assessm ent is that the recovery
in the global sem iconductor industry that began since m id-
2005 w ill continue to gain strength into 2006. The view of
an up-cycle in the industry is supported by forw ard-looking
Table 3.3
Real GDP by Sector (1987=100)
2005p 2006f
A nnual change (% )
A griculture 2.1 2.0
M ining 0.8 5.0
M anufacturing 4.9 7.0
C onstruction - 1.6 1.0
Services 6.5 6.0
Real GDP 5.3 6.0
p Prelim inary
f Forecast
Source: D epartm ent of Statistics, M alaysia
Bank N egara M alaysia
C03 Outlook & Policy pg86-106 4/14/06, 14:56 94
95
Outlook and Policy
indicators such as the im provem ent in the book-to-bill ratio
of sem iconductor equipm ent since M arch 2005, and the
sustained grow th in the US new orders and unfilled orders
for electronics. Industry experts also share the view that the
recovery w ould be m ild and sustained, w ith the global
sem iconductor sales projected to expand by 7.9 ~ 9.5% in
2006 and 7 ~ 10.6% in 2007 (2005: 6.8 ~ 7% ). The
current cycle w ould be supported by accelerating dem and
from the Asia-Pacific region, particularly for consum er
electronic gadgets and the stronger ICT-related investm ent
in the industrial countries.
The up-cycle in the global sem iconductor sector in 2006 is
expected to be broad-based, supported by expansion in all
product segm ents, including com puters, consum er
electronics, com m unication and the autom otive segm ents.
The w ider application of chips, particularly in the
autom otive segm ent, as w ell as the higher chip content in
electronic devices w ill further support the global dem and
for sem iconductors. G iven M alaysias com petitive strength
in the com puter and sem iconductor segm ents, M alaysia is
poised to benefit from this broad-based grow th in 2006.
During the year, continued re-investm ent in E&E and
expansion projects undertaken by existing m ultinational
electronics com panies in M alaysia w ould increase the
production capacity and enable M alaysia to leverage on
the upturn in the global sem iconductor industry.
The services sector w ould continue to rem ain strong in
2006 recording a sustained grow th of 6% . D uring the
year, the services sector grow th w ould be led by the
interm ediate services segm ent, w hile the final services
segm ent w ill expand at a m oderate pace in line w ith the
trends in private consum ption.
In the interm ediate services segm ent, the expected
higher grow th in m anufacturing exports and intra-
regional trade w ill further strengthen the grow th of the
transport, storage and com m unication sub-sector. O f
significance, trade-related activities such as logistics and
other services allied to transportation such as ports and
haulage activities are forecast to support grow th in the
transport sector. These are also part of m anufacturing-
related activities that w ould be given em phasis under
the Third Industrial M asterplan, w hich w ill be
im plem ented beginning 2006 until 2020. The
telecom m unications industry, m eanw hile, w ould
continue on a sustained strong expansion driven m ainly
by the cellular segm ent am idst the increased subscriber
base and expansion in third generation (3G ) services by
the m ajor telecom m unication com panies.
M eanw hile, dem and for trade financing and other types
of credit by businesses, especially from the sm all- and
m edium enterprises (SM Es) are expected to increase in
line w ith the m ore robust m anufacturing grow th and
trade activities. The higher lending activities, in addition
to innovative financial products and services offered by
the banking sector, w ould result in increased interest
and fee-based incom e. The expected establishm ent of
m ore Islam ic banks and takaful com panies during the
year w ould further enhance the grow th in the finance,
insurance and real estate and business services sub-
sector. Efforts by the G overnm ent in prom oting new
areas of grow th, such as IT-related services and shared
services and outsourcing (SSO ) activities, including
business process outsourcing, are also expected to yield
positive results and contribute to higher grow th in the
business services segm ent.
The final services segm ent is expected to expand at a
m oderate pace in line w ith private consum ption
activities during the year. N evertheless, tourism activities
are expected to gain further m om entum am idst the
intensification of prom otional activities by both the
public and private sectors in preparation for the Visit
M alaysia Year (VM Y) 2007. The G overnm ent plans to
achieve a target of 17.5 m illion tourist arrivals in 2006
and m ore than 20 m illion tourists during the VM Y 2007
(2005: an estim ate of 16.4 m illion). A s a result, higher
spending by tourists as w ell as dom estic households
w ould support the w holesale and retail trade, hotels
and restaurants sub-sector, w hich is expected to expand
at a sustainable rate of 6% in 2006. C onsequently, the
services sector w ill continue to be one of the m ain
engines of grow th, besides the m anufacturing sector, in
supporting the overall grow th of the econom y.
The agriculture sector is expected to record a grow th
of 2% in 2006. C rude palm oil, w hich accounts for
about one-third of the value-add in the agriculture
sector, is expected to increase by 1.6% (2005: 7% ).
O utput w ould be affected by biological yield dow n-
cycle after three successive years of strong output
grow th. The m oderation in output grow th is also due
partly to expectations of a slow er expansion in
m atured areas (+0.9% ; 2005: 5.3% ). N evertheless,
output of rubber and other agriculture produce are
expected to recover from the w eak perform ance in
2005, w hich w as affected by the poor w eather
conditions. Rubber production is expected to increase
by 2.3% to 1.15 m illion tonnes in 2006 as
sm allholders continue to intensify tapping activities
supported by the expected strong rubber prices.
In the mining sector, grow th is expected to strengthen
to 5% in 2005, driven m ainly by an expected
im provem ent in crude oil output (including condensates:
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 95
96
3.9% , 2005: -4.9% ). G row th w ould also be supported
by the m oderate increase in natural gas output during
the year (6.9% ; 2005: 11.3% ) as the utilisation rate at
the M LN G plants in Saraw ak approach close to its
installed capacity.
A fter tw o consecutive years of decline, the construction
sector is expected to turn around and register a positive
grow th of 1% , led m ainly by the im provem ent in the civil
engineering sub-sector. The civil engineering sub-sector
w ould be supported by higher construction activity in the
oil and gas industry as w ell as in public projects w ith the
com m encem ent of new projects under the N inth
M alaysia Plan. M eanw hile, the residential and non-
residential sub-sectors are expected to expand further
supported by the attractive financing conditions and brisk
business activities. The residential sub-sector is expected
to expand at a m oderate rate follow ing the strong
expansion in the last few years, w hile the non-residential
segm ent w ould continue to im prove, benefiting from the
favourable business environm ent w hich has resulted in
high occupancy rates of retail and office space.
Prices and Employment
The key supply-side factors that have kept inflation up
tow ards the end of 2005, nam ely the high prices of energy
and non-energy com m odities are expected to persist in
2006. Cost-push inflation is expected to rise follow ing the
increase in the price of petroleum products by the
G overnm ent on 28 February 2006. Dem and pressures
could also provide som e m odest upw ard im petus to
inflation as dom estic econom ic activity is expected to be
sustained in 2006. In the absence of further price
adjustm ents, inflation is expected to peak in the first half
of 2006. Subsequently, inflation is likely to ease in the
third quarter of 2006 follow ing the lapse of the effects of
price adjustm ents that w ere im plem ented in 2005. For
2006 as a w hole, the average rate of inflation is estim ated
to be in the range of 3.5% to 4% .
There rem ains how ever considerable uncertainty to the
inflation outlook w ith inflation prospects affected by both
external influences and dom estic cost-push pressures.
W ith no further fuel price increases during the year, the
m ain uncertainty relates to the degree and extent of the
secondary effects of the pass-through im pact of previous
increases in fuel prices that have yet to feed through the
supply chain. The sustained high level in international oil
prices could put an upw ard bias on input costs for
dom estic producers. An upw ard revision of electricity tariffs
w ould also affect the inflation conditions.
To a certain extent, the upside risks to dom estic inflation
could be m itigated by the on-going structural
1999 2000 2001 2002 2003 2004 2005 2006f
Graph 3.5
Consumer Price Index
A nnual change (% )
f Forecast
0
1
2
3
4
5
im provem ents in the M alaysian econom y. The
expansion of capacity by businesses and the continued
increase in productivity w ould augm ent the output
potential of the econom y and prevent a tightening in
the m arkets for factor inputs. Sustained com petition
am ongst businesses could also m itigate inflationary
pressures.
In tandem w ith the stronger grow th of the dom estic
econom y in 2006, grow th in employment is expected
to increase w ith m ore job opportunities in m ost sectors
of the econom y. U nem ploym ent is therefore, expected
to rem ain low at 3.5% . In addition to the ongoing
efforts to im prove the productivity of the labour force,
the G overnm ent w ould also continue review ing its
policy on labour, w ith a view to reducing the shortage
of skilled w orkers and closing the gap betw een the
output of the educational system and the requirem ents
of the job m arket.
Balance of Payments
The balance of paym ents position is expected to
rem ain strong in 2006 w ith a continued large
current account surplus (17.2% of G N P), supported
by a strong trade balance. Strong export grow th
(12.5% ) underpinned by continued expansion in
m anufactured exports, in particular exports of
consum er electronics, w ill contribute to a larger
surplus in the trade account. G row th in com m odity
exports is also expected to be sustained by high
prices. In the financial account, the steady inflow of
foreign direct investm ent (FD I) w ould also
strengthen the overall balance of paym ents.
The grow th in exports of manufactured goods is
expected to strengthen to 12% in 2006 (2005:
10.1% ) as the E& E sector rides on the upturn in the
global sem iconductor industry. Exports of E& E w ould
be supported by the strong global dem and for
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 96
97
Outlook and Policy
com puters, particularly for m obile com puters w ith
w ireless functions, as w ell as the expected
im provem ent in global sem iconductor dem and
arising from w ider applications of chips in various
segm ents. A t the sam e tim e, exports of resource-
based products such as chem icals, rubber and
petroleum products are also expected to perform
favourably, expanding at a strong pace underpinned
by the firm global dem and as w ell as higher prices in
line w ith the expected increase in com m odity prices
during the year.
The increase in com m odity prices w ould also be reflected in
higher export receipts from agricultural commodities,
w hich is expected to record a double-digit grow th of 10.5%
in 2006 (2005: 3.4% ). Receipts from palm oil exports are
expected to increase by 6.3% (2005: -5.3% ) am idst the
higher export price of RM 1,550 per tonne in 2006 (2005:
RM 1,456). The increase in price w ould be m ainly dem and-
driven, supported by higher global dem and, particularly
from new users for palm -based biodiesel, as w ell as from
traditional buyers. The expected higher dem and from PR
China is also encouraged by the abolition of the im port
quota on palm oil and a standardized im port duty structure
for all edible oils beginning 1 January 2006. Sim ilarly, grow th
in exports of rubber is expected to strengthen further by
21.6% (2005: 11.3% ) benefiting from a significant increase
in rubber prices (620 sen per kilogram m e; 2005: 513 sen
per kilogram m e). The strong outlook for rubber prices in
2006 is a result of expectations of continued strong
dem and, particularly from PR China; constraints in global
natural rubber output; and the im pact of strong crude oil
prices on the price of synthetic rubber, w hich is a
petrochem ical product. For the first tw o m onths of 2006,
the price of SM R20 increased by 46.2% to average 683 sen
per kilogram m e.
Mineral exports are expected to expand further by
18.6% , due to higher receipts from crude oil (including
condensates) and liquefied natural gas (LN G ). The
increase w ould be supported by higher prices as w ell as
an increase in volum e, in line w ith the expected increase
in production of these com m odities. For the year as a
w hole, the export price of M alaysian crude oil is projected
to average U SD 62 per barrel (2005: U SD 55.93 per
barrel), or 10.9% higher from the level in 2005. In the
first tw o m onths of 2006, the price of the M alaysian Tapis
Blend had averaged U SD 65.40. C rude oil prices w ould
continue to be influenced by fundam ental factors as the
gap betw een global supply and dem and narrow s further
am idst the im proved global outlook. Sentim ent on oil
prices w ould also be affected by geopolitical factors that
m ay disrupt global supply. Sim ilarly, in line w ith
expectations of higher energy prices in the global m arket,
LN G export prices are projected to rise further to
RM 1,120 per tonne (2005: RM 947 per tonne). A m idst
the higher prices, and an increase in dem and from
PR C hina, India and the U nited States, LN G exports are
estim ated to increase by 24.6% .
Import grow th (13.4% ) is expected to em anate from
higher im ports of interm ediate goods, consonant w ith
The current account surplus is
expected to remain large,
supported by a strong trade
balance. FDI inflows are
expected to increase, supported
by stronger demand arising
from the high capacity
utilisation rate as well as
investments in new industries.
Reflecting a greater interest by
companies to diversify abroad,
overseas investment by
Malaysian companies is also
forecast to increase in 2006.
Table 3.4
Balance of Payments
2005e 2006f
RM billion
G oods 126.5 138.4
Trade account 99.8 108.3
Exports (% annual change) 11.0 12.5
Imports (% annual change) 8.5 13.4
Services -10.2 -10.3
Balance on goods and services 116.2 128.1
Incom e -21.5 -23.7
C urrent transfers -17.0 -15.0
Current account balance 77.8 89.4
% of GNP 16.4 17.2
Financial account -42.0 -
Errors and om issions -23.0 -
of w hich:
Foreign exchange revaluation
loss -15.5 -
Overall balance 12.8 -
N ote: N um bers m ay not necessarily add up due to rounding.
e Estim ate
f Forecast
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 97
98
the forecast of stronger production and exports of the
m anufacturing sector, in particular, the electrical and
electronic segm ent. C apital im ports are expected to
strengthen (11.5% ) in line w ith capacity expansion in
the m anufacturing, services and oil and gas sectors.
H igher capital im ports in the services industry is
expected to be led by enhancem ent in netw ork
capacity by telecom m unications com panies and the
expansion of investm ent activities by the airlines and
shipping com panies. Increased exploration and
production activity in the oil and gas industry follow ing
the discovery of new fields w ill also result in an
increase in capital im ports.
The services account deficit is expected to be sustained
at 2% of G N P. O utflow s in the transportation account
w ould be higher, in line w ith higher volum e of trade.
M eanw hile, tourism earnings w ould continue to rem ain
as the largest contributor to services earnings. The
im provem ent in the other services deficit is expected to
em anate from exports of com m unications, business and
com puter and inform ation services. H igher receipts from
com puter and inform ation services are consonant w ith
the increasing trend in outsourcing activities, provision of
group support and back-office processing services.
The income account deficit is projected to be
sustained at 4.6% of G N P. The deficit is attributable
to higher profits and dividends accruing to
m ultinationals from their investm ents in M alaysia, in
line w ith the strong export perform ance of the
electrical and electronics industry as w ell as the oil
and gas industry. Profits and dividends accruing to
M alaysian com panies investing abroad are also
expected to be higher. M alaysian com panies w ith
investm ents in the oil and gas, plantation,
infrastructure and utilities sectors are expected to
provide a higher contribution to incom e inflow s.
The financial account is expected to im prove,
supported by long-term capital inflow s, particularly
FD I. FD I is expected to increase, w ith a large portion
continuing to be in the form of reinvestm ent by the
existing M N C s in M alaysia. Follow ing the higher level
of FD I approved by M ITI in 2005 (RM 17.9 billion;
2004: RM 13.1 billion), particularly from the U S, Japan
and Singapore, FD I in the m anufacturing sector is
projected to increase, w ith the im plem entation of
projects m ainly for higher-end electrical and
electronic activities. Sim ilarly, investm ent in the
services sector is expected to rem ain high, supported
by further liberalisation and entry of new players in
the finance, insurance, real estate and business
services sub-sector, as w ell as the expansion of
operations in the w holesale and retail trade, hotels
and restaurants sub-sector. M eanw hile, the oil and
gas sector w ill continue to receive sizable inflow s,
m ainly for extraction and production activities,
follow ing several discoveries of new oil fields.
Investm ent abroad by M alaysian com panies is expected to
increase further in 2006 as com panies diversify and
position them selves globally to provide greater synergy to
their corporate activities. These investm ents w ill continue
to be broad-based, and channelled into the oil and gas,
m anufacturing, utilities, construction, and services sectors.
MONETARY POLICY IN 2006
M onetary policy in 2006 w ould continue to em phasise
econom ic grow th in an environm ent of price stability.
The thrust of m acroeconom ic policy is thus to provide a
supportive environm ent to prom ote a sustainable level
of econom ic activity in the m edium term .
Econom ic grow th prospects for the global and regional
econom ies are expected to rem ain bright despite high oil
and com m odity prices. This is expected to be further
reinforced by the strengthening of the global electronic up-
cycle. The expansionary im pact from the external sector on
Table 3.5
Exports and Imports
2005p 2006f
RM billion
Gross exports 533.8 600.6
(% annual change) 11.0 12.5
Manufactures 429.9 481.4
(% annual change) 10.1 12.0
of w hich:
Electronics 208.2 235.1
(% annual change) 10.4 12.9
Electrical products 74.5 84.7
(% annual change) 8.9 13.6
C hem icals & chem ical products 29.7 32.6
(% annual change) 7.0 9.6
Minerals 52.3 62.0
(% annual change) 27.1 18.6
Agriculture 37.4 41.3
(% annual change) 3.4 10.5
Gross imports 434.0 492.3
(% annual change) 8.5 13.4
Capital goods 60.7 67.7
(% annual change) 9.5 11.5
Intermediate goods 308.3 351.8
(% annual change) 7.2 14.1
Consumption goods 24.6 26.1
(% annual change) 5.9 6.0
p Prelim inary
f Forecast
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 98
99
Outlook and Policy
the M alaysian econom y is expected to rem ain strong.
Building on the m om entum gained in the second half of
2005, G DP grow th is expected to im prove further in 2006.
Stronger export perform ance is expected to sustain
dom estic consum ption at a strong pace w hile the
favourable external and dom estic dem and conditions
w ould in turn provide further im petus for increased
investm ent activity.
W ith the econom y poised to register a firm
perform ance, the m ain challenge for m onetary
policy in 2006 is to ensure that price expectations
are w ell contained, w hile financing conditions are
supportive of investm ents. The prospects for
inflation w ould depend on several factors, both
foreign and dom estic. O n the international front, the
direction of international oil prices w ill continue to
be a m ajor concern. To date, the subsidies on fuels
and energy products have som ew hat sheltered the
econom y from the full im pact of global oil price
shocks. W hile there w ould be no further fuel price
increases during the year follow ing the recent
adjustm ent to fuel prices, som e uncertainty rem ains
on the degree of the second round im pact on the
general price level. The sustained high level in
international oil prices could put an upw ard bias on
input costs for dom estic producers. H ow ever, factors
such as capacity expansion and continued
im provem ents in productivity by businesses, as w ell
as sustained com petition am ongst firm s are
expected to m itigate inflationary pressures
som ew hat. Taking these factors into account,
inflation pressures in M alaysia are expected to
rem ain m anageable, w ith the inflation rate projected
to average betw een 3.5% to 4% in 2006.
To align m onetary conditions to the current
environm ent, the O PR w as raised by 25 basis points
to 3.25 percent on 22 February. The Bank w ill
continue to conduct m onetary policy in a m anner
that w ill constantly balance the need to rein in
inflationary expectations w hile rem aining supportive
of grow th. M onetary policy w ould thus respond to
new developm ents, both dom estic and international,
that w ould have im plications for the m edium -term
prospects for price stability and sustainable
econom ic grow th.
The shift to a m anaged float exchange rate regim e
does not entail a change in the m onetary policy
fram ew ork or operations. M onetary policy rem ains
focused on dom estic considerations w ith the O PR as
the signaling m echanism to achieve policy
objectives. Interest rates, therefore, w ill not be used
as an instrum ent to influence capital flow s or the
exchange rate. N otw ithstanding the tw o-w ay
intervention operations to sm oothen exchange rate
volatility and excessive exchange rate m ovem ents
induced by large short-term capital flow s, the Bank
w ould allow the ringgit exchange rate to be
determ ined by econom ic fundam entals and m arket
conditions. This is consistent w ith the stated
exchange rate policy objective of ensuring that the
ringgit does not becom e overvalued or undervalued
in a sustained m anner.
A s in 2005, the M onetary Policy C om m ittee (M PC ) is
scheduled to m eet eight tim es this year, w ith the
option to hold additional m eetings w hen necessary.
The calendar for the M PC m eetings, together w ith
the associated schedule of releases for the M onetary
Policy Statem ent, w as published on the C entral Bank
w ebsite in D ecem ber 2005. The Bank w ill continue
to undertake additional initiatives in 2006 to
enhance com m unication in prom oting greater
understanding of the objectives, processes and
conduct of m onetary policy.
FISCAL POLICY IN 2006
The 2006 Budget is the first annual Budget for the
N inth M alaysia Plan (2006-10). Fiscal policy in 2006
w ill thus focus on initiatives to generate greater
quality grow th in the near term to provide a strong
foundation for long-term sustainable grow th. The
2006 Budget put forth various m easures to enhance
national resilience and the ability to m eet em erging
external challenges arising from rising oil prices,
higher global interest rates and increasing global
com petition.
The 2006 Budget projections w ere broadly in line
w ith the G overnm ents prudent fiscal stance. W ith
the econom y regaining its grow th m om entum , the
Federal G overnm ents overall financial position is
expected to strengthen further in 2006. The fiscal
deficit has been budgeted to reduce further to
RM 18.4 billion or 3.5% of G D P from 3.8% in 2005.
In addition, after taking into account the potential
net revenue loss of RM 1 billion arising from tax
m easures announced in the 2006 Budget, the fiscal
deficit w ill be at RM 19.4 billion or 3.6% of G D P.
Total Federal G overnm ent expenditure (excluding
contingent reserves) w as budgeted at RM 134.7
billion, representing a m oderate increase of 5%
from the actual 2005 expenditure (2005: +6.8% ). In
term s of developm ent expenditure, special attention
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 99
100
w as given to both the econom ic and the social
sectors in an effort to reduce incom e disparities
betw een the rural and urban areas. In addition to
im proving the efficiency and effectiveness of the
Table 3.6
Federal Government Finance
RM billion % change
2005p 2006B 2005p 2006B
Revenue 106.3 114.6
1
6.9 7.8
O perating expenditure 97.7 101.2 7.1 3.6
Current account 8.6 13.3
G ross developm ent expenditure 30.5 33.5 5.8 9.7
Loan recoveries 3.3 0.7
Overall balance -18.7 -19.4
(% of GDP) -3.8 -3.6
1
Includes net revenue loss of RM 1 billion arising from the tax m easures announced
in the 2006 Budget.
p Prelim inary
B Budget
N ote: N um bers m ay not add up due to rounding.
public delivery system , the G overnm ent introduced
several m easures to stim ulate private investm ent,
including enhancing the business-friendly
environm ent through w ide-ranging tax and non-tax
m easures to im prove business com petitiveness;
diversify sources of grow th into new areas that have
high grow th potential; augm ent hum an capital
developm ent; further develop the capital m arket as
w ell as strengthen the developm ent of sm all and
m edium -sized enterprises. Key m easures announced
in the 2006 Budget are sum m arised in the w hite
box.
The G overnm ents prim ary objective for fiscal policy
continues to be to ensure a sound and sustainable
Federal G overnm ent financial position over the
m edium term . The focus w ould be on m aintaining
the fiscal deficit at an appropriate level w here a
balance betw een sustaining econom ic grow th and
preserving long-term fiscal sustainability is achieved.
First Strategy: Implementing Proactive Government Measures to Accelerate Economic Activity
Policy area Measures
Allow financially autonom ous statutory bodies to determ ine their ow n schem es ofservice.
Expedite the issuance of visas, particularly for know ledge w orkers and professionals
in the fields of IC T and financial services.
Expand the use of IC T to facilitate dealings betw een the public and G overnm ent.
Introduction of new m odalities of the G overnm ent procurem ent system in efforts to
reduce cost, enhance transparency and ensure value for m oney.
Second Strategy: Providing a Business-Friendly Environment
Provide group relief to all locally incorporated resident com panies.
A llow accum ulated losses and unabsorbed capital allow ances during the pioneer
period be carried forw ard.
Treat incom e of investm ent holding com pany listed in Bursa M alaysia as business incom e.
A llow estim ated losses on low -cost houses to be offset against estim ated profits of
other real property developm ent projects.
Exem pt stam p duty and real property gains tax on m ergers and acquisitions of
com panies listed on Bursa M alaysia.
A llow tax deductions on legal, valuation and consultancy expenses incurred in the
establishm ent of Real Estate Investm ent Trusts.
A llow tax deductions for discounts on an accrual basis until the m aturity of the
bonds for corporate issuing bonds.
Im proving further the
G overnm ents
delivery and
procurem ent
system s
Reducing cost of
doing business
Strengthening the
capital m arket
Key Measures Announced in the 2006 Budget
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 100
101
Outlook and Policy
Increase Fund for Food by RM 300 m illion.
Establish a new com pany to develop forest plantations com m ercially.
Khazanah N asional to establish the N ational A griculture and Food
C orporation w ith a capital of RM 500 m illion.
Set up the M alaysian Life Sciences C apital Fund, w ith RM 100 m illion from the
G overnm ent.
Extend tax incentives to qualifying com panies operating outside M SC .
Reduction of 50% for stam p duty charged on loans of up to RM 1 m illion taken by
sm all and m edium -sized enterprises (SM Es).
SM E Bank to set up a venture capital fund of RM 1 billion to finance SM Es.
Establish Bum iputera property trust foundation, Yayasan A m anah H artanah
Bum iputera w ith an initial capital of RM 2 billion.
Third Strategy: Developing Human Capital
A utom atic child relief for each child studying in local or recognised institutions of
higher learning.
Extend the child relief to disabled child pursuing tertiary education.
Extend the scope of individual tax relief of RM 5,000 for further education to
professional courses, accountancy and law .
A llow tax deductions on expenses incurred for developm ent and regulatory
com pliance of new courses by IPTS.
D ouble deduction to public listed com panies on the allow ances paid to participants
under the U nem ployed G raduates Training program m e.
Fourth Strategy: Enhancing the Well-Being and Quality of Life of the Rakyat
Reduction of road tax by 40% for private diesel vehicles exceeding 1,600 cc, except
in Saraw ak.
A llow husband and w ife to each claim one property for exem ption of Real Property
G ains Tax.
Increase tax rates on liquor and cigarettes.
Extend tax incentives to com panies providing energy conservation services.
M odernising the
agriculture sector
D eveloping the IC T
and biotechnology
sectors
O thers
Intensifying hum an
capital developm ent
Reducing financial
burden of M alaysians
O thers
FINANCIAL SECTOR POLICY IN 2006
A gainst the background of ongoing evolution and
developm ents that are shaping the financial landscape
and challenges brought about by econom ic and financial
liberalisation, the thrust of policies for the financial sector
in 2006 w ill focus on further strengthening the role,
capacity and contribution of the financial sector in the
econom ic transform ation and, hence, the successful
realisation of strategies outlined in the N inth M alaysia
Plan. Specifically, policies w ill be geared tow ards
preserving the stability that has been sustained over the
years by further strengthening institutional and system ic
resilience and com petitiveness, m aintaining an efficient
and effective financial infrastructure, and prom oting a
conducive regulatory and supervisory environm ent that
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 101
102
fosters a progressive, dynam ic and resilient financial
system . These efforts w ill be com plem ented by the
ongoing consum er education initiatives and protection
fram ew ork to ensure w ell-inform ed and em pow ered
consum ers as w ell as fair and equitable financial dealings
am idst a stable socio-econom ic environm ent. O f equal
im portance, particularly in light of the structural changes
that are taking place in the dom estic econom y, em phasis
w ould also continue to be accorded to further im proving
the efficiency of accessibility of various segm ents in the
econom y to financing to be able to contribute effectively
to the econom ic developm ent and transform ation.
W ith the Financial Sector M asterplan already in its
second phase, the locally-incorporated foreign banks
(LIFBs) are expected to becom e m ore integrated w ithin
the dom estic econom y to m eet the grow ing
requirem ents of the banking public. The operational
flexibility accorded to the LIFBs through the
establishm ent of additional branches w ould enhance
accessibility of banking services to larger segm ents of
society including those outside the urban areas. The
operational flexibility w ill also allow the LIFBs to better
understand the requirem ents of the different segm ents
of the econom y thereby enabling them to play a m ore
direct role in econom ic developm ent. A t the sam e tim e,
the expanded netw ork of the LIFBs w ould also provide
the public w ith a broader range of products and
services. A s the LIFBs begin to operationalise the new
branches, the C entral Bank w ill m onitor their
contribution and effectiveness.
W hile the progress in the area of capacity and capability
building has thus far been com m endable, the
developm ent of a pool of talented and skilled personnel
rem ains a priority. W ith the pace of evolution in the
financial sector becom ing faster and that there is
grow ing dem and for differentiated and m ore com plex
financial instrum ents by the econom y, the need for the
financial sector to have the intellectual and com petent
hum an resources becom es even m ore critical, not only
in m eeting these dem ands but in ensuring the ready
availability of best talents and high calibre professionals
to drive the banking industry forw ard. Investm ent in
such talents w ill create value and im prove the
perform ance of the institution. W hile there is a shortage
in such talents in M alaysia, in view of the fast pace of
developm ents, the advanced financial system s and
m arkets around the w orld have nurtured specialists in
various aspects of banking operations. To enable the
M alaysian banking industry to tap these foreign talents
to strengthen the dom estic industry and nurture
dom estic capabilities, especially in new ly em erging
areas, review is already underw ay to provide am ongst
others greater flexibility for banking institutions in the
em ploym ent of such expertise.
The em ergence of investm ent banks is envisaged to pave
the w ay for further developm ent and m aturity of the
M alaysian capital m arket. W hile the developm ent w ill
create new business opportunities, particularly cross-
border activities, new risks and challenges can be
expected to em erge. G iven the nature of investm ent
banking activities, efforts in 2005 have been focused
tow ards the harm onisation of regulations and the
em placem ent of a m echanism for regulatory and
supervisory coordination and cooperation betw een Bank
N egara M alaysia and the Securities C om m ission in order
to alleviate overlaps in functions and to ensure
consistency in policies and regulations for the investm ent
banks. A s these have already been com pleted, policy
initiatives in 2006 w ill focus on the operationalisation of
the investm ent bank fram ew ork. O ther than the
m erchant banks, w hich are existing players, prospective
new players w ill appear arising from the transform ation
of universal brokers and discount houses into investm ent
banks. Em phasis w ill be accorded tow ards assessing the
strength and capability of these new players. G iven the
rigorous requirem ents w hich investm ent banks have to
com ply, due diligence exam ination w ill be conducted on
these prospective players aim ed at ensuring that the new
players have the pre-requisites to assum e their new roles.
A part from increasing com petition, it is also envisaged
that the entry of new players into the industry w ill
increase staff m obility and thus the need for continuing
hum an resource developm ent. M eanw hile, the
integration of the banking and capital m arket activities
under a single entity w ill entail w ider risks that need to be
appropriately aggregated and m anaged in order to
ensure financial sector resilience, soundness and stability.
Prom oting the soundness and stability of the banking
system rem ains high on the agenda of Bank N egara
M alaysia not only for the developm ent of the sector, but
also to prom ote sustained grow th in econom ic activity
and national prosperity. In 2005, m uch em phasis had
been directed at prom oting sound risk m anagem ent
practices and corporate governance standards w ithin
the banking industry. W hile these efforts w ill continue
to be pursued in 2006, greater attention w ill be directed
tow ards strengthening institutional capacity of m arket
players to w ithstand any potential financial shocks or
m acroeconom ic im balances and to have the agility to
em brace future challenges. In order to prepare for this,
a survey w as carried out in 2005 to assess the state of
readiness of the banking institutions to cope w ith
em ergencies and unexpected disruptions to their
operations. The response and inform ation gathered
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 102
103
Outlook and Policy
from this exercise has been beneficial and w ill be used
as input in the form ulation of the guidelines on
business continuity m anagem ent for the banking sector
due for issuance in 2006. The guidelines aim at
reinforcing the im portance of sound business continuity
m anagem ent and at ensuring that banking institutions
are w ell-equipped w ith recovery capabilities necessary
for the near or instant continuation of their critical
business functions in the event of a m ajor disruption.
In an environm ent w here changes are constantly taking
place, the responsibility of m aintaining financial system
stability is no longer the sole responsibility of the Central
Bank. The banking industry, together w ith its custom ers,
shareholder and other stakeholders are also accountable
for their actions and share the task of m aintaining stability
of the overall system . In realising this objective, the Central
Bank has finalised the review of the shareholding policy
w hich is expected to be im plem ented this year. This policy
aim s at broadening the role of shareholders in overseeing
the perform ance and behaviours of their institutions and
the effectiveness of m anagem ent in conducting the
business in a responsible, efficient and professional
m anner. It is envisaged that the greater participation of
institutional investors in the banking sector w ill contribute
tow ards further developm ents of these aspects of the
banking institutions.
A s the im plem entation date for the new Basel C apital
A ccord (Basel II) draw s near, consultations and
collaborative efforts w ith the banking industry w ill
intensify, to allow both the regulator and banking
institutions to identify and deliberate on critical issues
and m onitor the preparatory process to ensure the
sm ooth im plem entation of Basel II. Feedback from the
consultations w ill be used as input to the concept
papers on Basel II. G iven the com plexity and
extensiveness of Basel II requirem ents, a series of
concept papers w ill be issued w ith the first being on the
basic approaches for credit and operational risks.
M alaysia rem ains com m itted tow ards aligning its
accounting practices to international standards through
the adoption of the new and revised Financial Reporting
Standards (FRS). O f significance, is the proposed
FRS 139 w hich specifies new accounting rules on
recognition, m easurem ent and classification of financial
instrum ents in the financial statem ents, rules on asset
im pairm ent and provisioning, and new requirem ents for
the use of hedge accounting. The adoption of the
FRS 139 w ould in practice involve a considerable degree
of judgem ent and estim ation, com plex system s and
procedures as w ell as reliance on internal valuation
m odels by banking institutions particularly for the
provisioning and m easurem ent of financial instrum ents.
H ence, the ability of banking institutions in
im plem enting the FRS 139 w ould depend on their
internal capabilities and the availability of the necessary
infrastructure to ensure not only that their financial
statem ents continue to portray a true and fair view but
are sufficiently credible to be used in the context of
supervisory assessm ent. In this regard, Bank N egara
M alaysia w ill be issuing a guideline that outlines the key
capabilities and expectations that m ust be m et by
banking institutions prior to the adoption of the
FRS 139. The scope of the supervisory expectations
includes requirem ents pertaining to credit review and
im pairm ent provisions for effective im plem entation of
provisioning requirem ents in banking institutions,
recognition and de-recognition for sell and buy back
agreem ents (SBBA ) and financing sold w ith recourse
under Islam ic contracts and fair value option on
financial instrum ents.
C ontinuous and com prehensive surveillance is
im m ensely crucial to ensure the accurate and tim ely
identification and assessm ent of financial system
vulnerability and fragility. G iven the close
interconnectivity betw een the banking sector and the
econom y, the approach to and scope of surveillance by
the supervisors has, in recent years, been broadened to
encom pass m acro and m icro surveillance and the
assessm ent of key financial soundness indicators. A t the
m acro level, initiatives w ill be focused on further
enhancing the scope and depth of the surveillance
fram ew ork by em ploying a broader range of forw ard-
looking tools for m onitoring the financial and econom ic
environm ent. This involves assim ilating developm ents in
the various com ponents in the econom y and financial
m arkets w ith the banking sector and assessing the
im plications. A n area that has gained m uch attention in
recent periods is the grow ing exposure of the banking
sector to the household sector and the rapid increase in
household indebtedness. W hile this developm ent has
thus far been w ithin prudential levels, the C entral Bank
w ill rem ain vigilant to ensure the sustainability of the
household sector and to preserve financial stability.
These include m easures to further strengthen the risk
m anagem ent of banking institutions in m anaging their
exposure to this sector, as w ell as to prevent over-
leveraging by households. This is critical to ensure the
continued capacity of the household sector in
contributing tow ards sustained econom ic expansion.
W ith the ongoing introduction of new financial
instrum ents, the task of ensuring effective surveillance
by supervisors becom es m ore com plex and dem anding.
G oing forw ard, m ore rigorous surveillance w ill also have
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 103
104
to be undertaken at the institution level. In this regard,
the stress test fram ew ork w ill be enhanced to ensure its
robustness as a tool in assessing the resilience of
banking institutions to a broad range of econom ic and
financial shocks. A necdotal evidence has suggested that
know ledge and understanding of events leading up to
crises and instabilities in the past provide invaluable
inform ation to supervisors. A s such, it is envisaged that
w ith the early detection of em erging vulnerabilities and
w eaknesses w ithin a banking institution, tim ely and
appropriate intervention should be instituted to preserve
the stability of the system .
The grow ing com plexity in the group structure of
financial institutions has called for a m ore holistic
supervisory approach to facilitate m ore accurate
assessm ent of a financial conglom erates risk exposures
and the adequacy of the risk m anagem ent system s at
the group level. Taking into consideration the feedback
from the industry follow ing the issuance of the first
concept paper, a second concept paper on the
fram ew ork for the consolidated supervision of financial
conglom erates w ill be issued in 2006.
O n the supervisory front, focus w ill also be accorded to
further strengthen the capability and capacity of
supervisors to better cope w ith the changing and m ore
challenging environm ent in the financial m arkets and
econom y. This is particularly im portant in view of the
im plem entation of the Basel II and as the C entral Bank
m oves tow ards the adoption of principle-based
regulatory fram ew ork w here judgem ent w ill be a key
elem ent in the supervision and assessm ent of the
resilience of a banking institution. The rigorousness of
the analytical process under the Basel II fram ew ork is
undoubtedly dem anding from the supervisory
perspective, particularly in developing the appropriate
response and assessm ent fram ew ork on these
processes. Supervisory attention w ill need to ensure that
the analytical processes are undertaken to support
decision m aking rather than m erely m eeting regulatory
expectations or according excessive em phasis on
validating the detailed quantitative and statistical
procedures. It is also critical that supervisors undergo
early and rigorous training to accelerate their capacity
building efforts to enable the identification of the
relevant issues w hen undertaking the supervisory
assessm ent. In this regard, various initiatives have been
put in place to accelerate the training and skill
developm ent in 2006.
Enhancem ent to the consum er education fram ew ork and
the strengthening of the infrastructure for better
consum er protection w ill rem ain a priority, both to
prom ote a progressive banking sector as w ell as to foster
public confidence in the financial system . W ith the
grow th in com plexity of financial products and services,
and greater expectation on consum ers to take on m ore
responsibility in m anaging their finances, efforts w ill
continue to be directed tow ards elevating their financial
literacy levels to facilitate m ore m eaningful decisions
appropriate to their needs and capacity for risk. M ore
confident and financially savvy consum ers w ill be better
equipped to exercise a stronger influence on financial
service providers and to drive com petition and
perform ance. Significant attention continues to be
accorded to prom ote a higher level of disclosure and
transparency as w ell as com parability of inform ation in
the financial system . In this regard, the w ork on the
form ulation of a m ore com prehensive product
transparency and disclosure fram ew ork w ill be
intensified. In principle, the fram ew ork aim s at providing
consum ers w ith adequate and relevant inform ation to
m ake an inform ed decision relating to financial products
and services. In furthering efforts to strengthen the
consum er protection fram ew ork, issues relating to
m arket conduct w ill be greatly em phasised to ensure fair
and equitable treatm ent of all consum ers. The
establishm ent of the C redit C ounselling and D ebt
M anagem ent A gency (C C D M A ) in A pril 2006 w ill m ark a
significant m ilestone in the developm ent of a
com prehensive consum er protection infrastructure in
M alaysia. A s the grow th m om entum in household
spending and household debt is expected to continue
into the future, the C C D M A w ill provide an im portant
avenue for individuals to seek credit counselling, debt
restructuring and settlem ent services, and obtain financial
education from expertise and professionals w ith regard to
the m anagem ent of their finances and debts.
[Please refer to the box article on the Establishment of
the Credit Counselling and Debt Management Agency
for details.]
Ensuring the safe and efficient operation of the paym ent
system s w ill rem ain a key policy objective. O ver the years,
the banking industry has progressively introduced several
electronic-based retail paym ent system s, com pleted the
m igration of the ATM and credit cards to chip-based
infrastructure and leveraged on technology such as
m obile telecom m unication devices to provide m ore
convenient paym ent services. G iven these achievem ents,
the policy focus in 2006 w ill be geared tow ards providing
an enabling environm ent for m ore electronic paym ent
m ethods to be introduced, prom oting the use of form al
paym ent channels and coordinating industry efforts in
the m igration to electronic paym ents. The efficiency in
cheque processing w ill be im proved by leveraging on the
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 104
105
Outlook and Policy
im aging technology to truncate cheques, thereby
reducing the physical handling of cheques in the clearing
process. A t the sam e tim e, m easures w ill be taken to
im prove the current electronic paym ent services to
encourage the greater use of these electronic paym ent
channels. To prom ote the use of form al paym ent
channels, banking institutions w ill be allow ed to appoint
third party collecting agentsto im prove accessibility of
their rem ittance services. Sim ilarly, qualified non-banking
institutions w ill also be allow ed to offer rem ittance
services. In leading the industry to adopt m ore cost
effective paym ent m ethods, a coordinating body w ill be
established to engage the various stakeholders in
prom oting the m igration to electronic m eans of
paym ents on a nationw ide basis. In addition, efforts w ill
continue to be pursued in enhancing industry security
standards and establishing m echanism s to effectively
m itigate paym ent risks. W ith the grow th of e-banking
transactions, the Internet banking guidelines w ill be
revised to ensure that the industry adopts best practices
and devotes sufficient resources in com bating cyber crim e
and digital attacks. Further, a paym ent versus paym ent
settlem ent m echanism w ill be introduced to m itigate the
risks associated w ith inter-bank foreign exchange
transactions, particularly for U SD and RM trades.
In 2006, the m ajor policy thrust for the Islam ic banking
sector w ill concentrate on further strengthening the
resilience of the Islam ic banking system and expanding
the capacity and capability of the Islam ic financial
institutions. This is in line w ith the objective of
enhancing the integration of the dom estic Islam ic
banking sector w ith the international Islam ic financial
landscape, and strengthening M alaysias position as a
leading Islam ic financial centre. The regulatory
fram ew ork for the Islam ic financial institutions (IFIs) w ill
be strengthened follow ing the issuance of the Islam ic
Financial Services Boards (IFSB) standards on capital
adequacy and risk m anagem ent. Islam ic financial
institutions are required to conform to the new
requirem ents w ith effect from 1 January 2007. In
addition, a fram ew ork on the governance of the
investm ent account holders and a revised guideline on
corporate governance for the IFIs w ill be introduced by
Bank N egara M alaysia to further reinforce the
institutional fram ew ork. O ther areas that w ill be
enhanced include the legal and Shariah fram ew ork,
product and m arket developm ent, and hum an capital
developm ent and consum er education.
The legal and regulatory fram ew ork is expected to be
strengthened w ith the tabling of the revised Islam ic
Banking A ct 1983 in Parliam ent in 2006. Efforts w ill also
be directed at m eeting the m anpow er requirem ents
through the establishm ent of the International C entre for
Education in Islam ic Finance (IN C EIF) in A pril 2006. Talent
building is one of the key factors identified for the
developm ent of innovation in Islam ic banking products
and services and IN C EIF is expected to increase the pool
of required talent in the global Islam ic financial m arket.
N ew policies and initiatives w ill also focus on m aking the
Islam ic financial services environm ent in M alaysia to be
m ore conducive and investm ent-friendly to the
international Islam ic financial com m unity. Prom otion and
m arketing efforts w ill target at attracting funds from
individuals and m ultinational corporations, particularly
from the M uslim countries, to use M alaysia as the
platform for their investm ent as w ell as financing needs.
The thrust of policy for the developm ent financial
institutions (D FIs) in 2006 is to further strengthen the
capacity and capability of the D FIs tow ards nurturing
and developing efficient, effective and robust D FIs in
providing financial and non-financial support to the
targeted sectors of the econom y. W ith the com pletion
of the rationalisation exercise involving four D FIs in
2005, initiatives going forw ard w ill focus on enhancing
the functions and scope of activities of the D FIs in
m eeting their m andates and the financial and
developm ental needs of their respective targeted
sectors. These, am ong others, include strengthening
their financial capacity as w ell as broadening the range
of products and services offered by the D FIs. Tow ards
this end, further efforts w ill be undertaken to enhance
the outreach and effectiveness of the advisory services
provided by the D FIs to the SM Es, especially through
collaboration w ith relevant G overnm ent agencies.
A nother im portant focus w ill be the enhancem ent of
the regulatory environm ent to facilitate the operations
of the D FIs through custom ised prudential requirem ents
and regulatory standards, as w ell as im proving their
financial soundness and risk m anagem ent practices.
Em phasis w ill also be accorded tow ards enhancing the
efficiency of the D FIs. In this regard, initiative w ill be
undertaken to establish a com prehensive perform ance
m easurem ent fram ew ork for the D FIs, com prising both
financial and non-financial perform ance indicators.
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 105
C03 Outlook & Policy pg86-106 3/14/06, 9:13 PM 107
The Financial System
Sources and U ses of Funds of the Financial System
Progress of Financial Sector M asterplan Im plem entation
108-112
112-113
108
The Financial System
Sources and Uses of Funds of the Financial
System
The continued expansion in econom ic activity during
the year w as reflected in the grow th of total assets of
the financial system , w hich grew by 8.1% or
RM 143.6 billion to RM 1.9 trillion as at end-2005. A s
at end-2005, the total assets of the financial system
w ere equivalent to 386% of G D P (2004: 392.5% ).
A ssets of the banking system and the non-bank
financial interm ediaries (N BFIs) expanded in 2005,
albeit at a slow er rate at 7.7% (2004: 13.6% ) and 9%
(2004: 11.6% ) respectively. The C entral Banks assets
recorded a m ore m oderate grow th in 2005 due to a
sm aller increase in the holdings of gold and foreign
exchange reserves. A m oderate grow th in assets w as
also registered by com m ercial banks and discount
houses, w hile m erchant banks and Islam ic banks
recorded a higher increase in assets.
The contribution of assets by type of institutions
changed during the year, reflecting the continued
transform ation of the M alaysian financial system .
Firstly, follow ing the com pletion of the m erger
exercises of five finance com panies w ith their
respective parent com m ercial banks, the assets of the
com m ercial banks rose by 14.4% to account for a
larger share of 44.1% share of total financial system
assets (2004: 41.7% ), w hile the share of finance
com panies declined to 1.4% (2004: 3.9% ). Secondly,
w ith the greater em phasis on developing Islam ic
financial services, the share of Islam ic banksassets in
Table 4.1
Assets of the Financial System
A nnual change
RM billion
Banking system 142.1 91.7 1,280.8
Bank N egara M alaysia 84.0 10.6 295.4
C om m ercial banks 127.3 106.1 842.4
Finance com panies -73.5 -41.5 26.9
M erchant banks -1.4 3.9 46.6
Islam ic banks 3.9 18.6 43.5
D iscount houses 1.7 -5.9 26.0
Non-bank financial intermediaries 59.7 51.9 627.7
Provident, pension and insurance
funds 35.6 39.8 423.2
Employees Provident Fund 20.2 23.5 263.9
Other provident & pension funds 4.8 5.6 56.8
Life insurance funds 10.0 9.6 83.7
General insurance funds 0.6 1.0 18.8
D evelopm ent financial institutions
1
12.4 8.7 100.1
O ther financial interm ediaries
2
11.7 3.5 104.4
Total 201.8 143.6 1,908.5
1
Refers to Bank Pem bangunan M alaysia Berhad, Bank Kerjasam a Rakyat
M alaysia Berhad, Bank Sim panan N asional, Export-Im port Bank of M alaysia
Berhad, Bank Pertanian M alaysia, Bank Perusahaan Kecil dan Sederhana
M alaysia Berhad (SM E Bank), M alaysian Industrial D evelopm ent Finance Berhad,
Sabah D evelopm ent Bank Berhad, Borneo D evelopm ent C orporation (Sabah)
Sendirian Berhad, Borneo D evelopm ent C orporation (Saraw ak) Sendirian Berhad,
C redit G uarantee C orporation M alaysia Berhad, Sabah C redit C orporation and
Lem baga Tabung H aji. Prior to 1 O ctober 2005, data included Bank Industri &
Teknologi M alaysia Berhad and M alaysia Export C redit Insurance Berhad and
excluded SM E Bank.
2
Refers to unit trusts run by A m anah Saham N asional Berhad (A SN B) and A m anah
Saham M ara Berhad, cooperative societies, leasing and factoring com panies, and
housing credit institutions (com prising C agam as Berhad, Borneo H ousing
M ortgage Finance Berhad and M alaysia Building Society Berhad).
p Prelim inary
2004
A s at
end-
2005p
2005p
Total Assets: RM 1,908.5 billion
p Prelim inary
Graph 4.1
Assets of the Financial System as at end-2005p (% share)
C om m ercial banks
44.1%
Life insurance funds
4.4%
Bank N egara M alaysia
15.5%
O ther financial
interm ediaries
5.5%
Em ployees Provident Fund
13.8%
G eneral insurance funds
1.0%
Finance com panies
1.4%
M erchant banks
2.4%
Islam ic banks
2.3%
D evelopm ent financial
institutions
5.2%
D iscount houses
1.4%
O ther provident and pension funds
3.0%
Provident, pension
and insurance funds
21.7%
C04 Financial Sector pg108-114 3/14/06, 9:14 PM 108
109
The Financial System
Table 4.2
Sources and Uses of Funds of the Financial
System
A nnual change
A s at
end-
2004 2005p 2005p
RM billion
Sources:
C apital and reserves 18.1 9.3 176.3
C urrency 2.9 2.0 34.4
D eposits 126.2 86.6 922.2
Borrow ings 3.9 3.7 56.4
Funds from other financial institutions
1
-15.9 12.5 84.2
Insurance, provident and pension funds 32.3 36.2 374.1
O ther liabilities 34.2 -6.7 260.9
Total 201.8 143.6 1,908.5
Uses:
C urrency -0.5 0.9 6.0
D eposits w ith other financial
institutions 21.6 8.0 256.0
Loans and advances
2
56.4 66.0 721.7
Securities 23.6 35.0 468.0
Treasury bills -3.1 1.3 1.7
Commercial bills -5.1 -1.1 7.3
Malaysian Government (MGS) 14.3 13.7 153.2
Corporate 17.4 19.2 290.8
Private Debt Securities (PDS) 8.0 10.5 140.8
Equities 9.5 8.6 150.0
Foreign 1.1 2.1 6.7
Others -1.2 -0.1 8.4
G old and foreign exchange reserves 9.5 8.6 264.4
O ther assets 17.1 19.0 192.4
1
Includes statutory reserves of banking institutions.
2
Excludes loans sold to D anaharta.
p Prelim inary
p Prelim inary
Graph 4.2
Sources and Uses of Funds of the Financial
System as at end-2005p (% share)
Total: RM1,908.5 billion
USES
SOURCES
13.7%
19.6%
10.1%
4.4%
13.9%
24.5%
3.0%
37.8%
48.3%
1.8%
13.4%
9.2%
0.3%
C apital and reserves
C urrency
D eposits
Borrow ings
Funds from other financial institutions
Pension, provident and insurance funds
O ther liabilities
C urrency
D eposits w ith other financial institutions
Loans and advances
Securities
G old and foreign exchange reserves
O ther assets
the financial system expanded to 2.3% of total
financial assets from 1.4% in the previous year. D uring
the course of the year, four additional Islam ic banks
w ere established as a result of m easures taken to
liberalise and accelerate the grow th of Islam ic banking
industry by allow ing foreign Islam ic banks to operate in
M alaysia. Thirdly, as part of the fram ew ork for the
creation of investm ent banks, the seven discount
houses currently in operation w ould be rationalised
and m erged w ith stockbroking com panies and
universal brokers to form investm ent banks. A rising
from the rationalisation process, the assets of the
discount houses declined by RM 5.9 billion to account
for a reduced share of 1.4% of total assets of the
financial system (2004: 1.8% ).
M eanw hile, the expansion in assets of the N BFIs w as
contributed largely by a higher increase of the
provident, pension and insurance fundsassets. A ssets
of the provident and pension funds (PPFs) increased by
10% during the year and contributed 16.8% of the
total assets of the financial system . This grow th w as
attributed to the increase of investm ents in debt
Table 4.3
Non-Financial Private Sector Deposits
1
with the
Financial System
2
A nnual change
A s at

end-
2004 2005p
2005p
RM billion
D eposits
3
w ith:
C om m ercial banks 87.9 64.1 498.0
Finance com panies -35.4 -22.6 6.0
M erchant banks 0.8 1.3 16.0
Islam ic banks 2.1 10.8 22.2
D iscount houses 1.8 -2.8 9.7
N ational Savings Bank 1.8 2.2 12.2
O thers
4
5.5 0.7 37.3
Total 64.6 53.6 601.5
D em and deposits 10.3 9.3 97.2
Saving deposits 5.5 2.4 76.5
Fixed deposits 35.3 19.7 362.9
of which:
Up to 1 year 34.2 19.4 334.7
More than 1 year 1.1 0.3 28.2
N ID s
5
5.2 10.7 18.6
Repos
6
8.3 11.5 46.3
1
Refers to deposits placed by business enterprises (excluding NFPEs) and individuals.
2
Excludes provident and pension, insurance and unit trust funds.
3
Refers to dem and, savings and fixed deposits, negotiable instrum ents of
deposits and repos.
4
Includes developm ent financial institutions, cooperative societies and housing
credit institutions.
5
Refers to negotiable instrum ents of deposits.
6
Refers to repurchase agreem ents.
p Prelim inary
C04 Financial Sector pg108-114 3/14/06, 9:14 PM 109
110
securities and equities, as w ell as from higher lending
activity by PPFs in 2005.
A ssets of the insurance funds grew at a sim ilar pace,
registering 11.6% grow th and accounted for 5.4% of
the total assets of the financial system as at end-
2005. Bulk of the grow th in the assets w as driven by
the life insurance funds (including Takaful fam ily
funds) w hich accounted for 82% of the total
insurance funds assets. In term s of grow th, the assets
of Islam ic insurance funds grew at a higher rate of
14.9% , com pared to the conventional insurance
funds w hich grew by 11.4% .
The sources of financing for the financial system w ere
contributed m ainly by the deposits placed w ith the
financial institutions as w ell as contributions to the
provident, pension and insurance funds. Deposits
m obilised by the financial system increased by RM 86.6
billion, or 10.4% during the year. The banking institutions
rem ained the largest m obiliser of the deposits, contributing
72.1% of the total increase in deposits during the year and
accounted for 77.5% of total outstanding deposits
m obilised in the w hole financial system .
In term s of deposits by holders, individuals and businesses
contributed the bulk of the deposits placed w ith the
banking system and developm ent financial institutions
(DFIs). Deposits placed by individuals w ith the banking
system and DFIs increased by 5.4% in 2005 (2004: 9.6% ),
w hile deposits placed by businesses grew by 15.3% (2004:
p Prelim inary
Graph 4.3
Non-Financial Private Sector Deposits with the Financial System
as at end-2005p (% share)
By Institutions
Total Deposits: RM601.5 billion
By Types of Deposits
Total Deposits: RM601.5 billion
Finance com panies
1.0%
M erchant banks
2.7%
Islam ic banks
3.7%
D iscount houses
1.6%
Bank Sim panan N asional
2.0%
O thers
6.2%
D em and deposits
16.2%
Savings deposits
12.7%
N ID s
3.1%
Repos
7.7%
U p to 1 year
55.7%
M ore than 1 year
4.7%
Fixed D eposits
60.3%
C om m ercial banks
82.8%
18.8% ). In 2005, the grow th in deposits w as in line w ith
the continued grow th in the nations incom e as reflected in
the strong grow th of 11.3% in G NP.
Table 4.4
Direction of Credit
1
to the Non-Financial Private
Sector
A nnual change
A s at
end-
2004 2005p
2005p
RM billion
Loans and advances 55.3 70.6 683.5
A griculture 0.7 0.2 14.2
M ining and quarrying -0.1 -0.2 0.8
M anufacturing 2.5 -0.4 58.1
C onstruction and real estate 3.9 4.6 84.4
Purchase of residential properties 19.2 18.5 187.8
Retail, w holesale, restaurants and
hotels 3.2 1.6 25.7
Transport, storage and
com m unications 0.0 3.4 18.9
Business services 1.6 1.2 23.3
Electricity, gas and w ater supply 0.7 -0.4 5.7
C onsum ption credit 15.0 22.2 133.4
Purchase of shares -0.4 1.6 20.5
O thers 8.9 18.2 111.0
Investments in corporate
securities 15.6 21.2 289.0
Total 71.0 91.8 972.5
1
Excludes credit to non-financial public enterprises.
p Prelim inary
C04 Financial Sector pg108-114 4/14/06, 15:00 110
111
The Financial System
Purchase of residential property
19.3%
C onstruction & real estate
8.7%
M anufacturing
6.0%
A griculture, m ining and quarrying
1.5%
Retail, w holesale, hotels and restaurants
2.6%
Transport, storage & com m unications
1.8%
C onsum ption credit
13.7%
Electricity, gas and w ater supply
0.6%
Purchase of shares
2.1%
Business services
2.4%
O thers
11.4%
Total Credit: RM972.5 billion
p Prelim inary
Graph 4.5
Direction of Credit to the Non-Financial Private Sector as at end-2005p (% share)
Investm ent in
corporate securities
29.7% Loans and advances
70.3%
A part from deposits placed w ith financial institutions,
contributions to the provident, pension and insurance
funds rem ained as the second m ain source of
financing to the financial system , w hich accounted
for 19.6% of the total financing resources. The
contributions to the provident and pension funds
(PPFs) continued to grow by 10.7% during the year
and w ere largely dom inated by contributions to the
Em ployee Provident Fund (91.3% of total
contributions to PPFs).
The increase in the total resources of the financial system
in 2005 w as m ainly channeled into loans and advances
as w ell as investm ent in debt securities and equities.
Graph 4.4
Loans and Advances by Institutions (% share)
2000
Total Loans and Advances: RM512.5 billion
2005p
Total Loans and Advances: RM721.7 billion
D evelopm ent financial
institutions
4.1%
Provident, pension and
insurance funds
5.7%
H ousing C redit
Institutions
5.5%
O thers
3.5%
D evelopm ent financial
institutions
6.6%
Provident, pension and
insurance funds
9.1%
H ousing C redit
Institutions
4.8%
O thers
2.5%
Banking institutions
81.2%
Banking institutions
77%
p Prelim inary
C04 Financial Sector pg108-114 4/14/06, 13:26 111
112
Loans and advances extended by the financial system
grew by 10.1% during the year and rem ained the largest
type of asset in the financial system (37.8% share of total
assets). The banking institutions w ere the largest provider
of the loans and advances w ith a 77% share, follow ed by
the PPFs and D FIs. The share of loans provided by PPFs
and D FIs has expanded since 2000, reflecting the greater
role of D FI in financing the econom y as w ell as the
diversification of asset allocation of PPFs.
In 2005, the dem and for loans and advances w ere driven
m ainly by the household sector, particularly for the
purchase of residential properties and consum ption
credit, w hich together accounted for 57.7% of the
increase in total loans and advances during the year.
M eanw hile, w ithin the business sector, the loans
extended to the sm all and m edium -sized enterprises
posted a higher grow th of 8.7% in 2005 (2004: 7.7% ).
Investm ent in securities (debt and equities) by the
financial system expanded further by 8.1% in 2005
(2004: 5.8% ) due m ainly to the increase in holdings of
securities by PPFs. The PPFs held 50.2% and 47.7% in
debt securities and equities investm ent, respectively.
M eanw hile, the holdings of securities by the banking
institutions dropped during the year reflecting a shift in
portfolio allocation from long-term securities to short-
term securities follow ing the anticipation of further
interest rate increase in the future.
Progress of Financial Sector Masterplan
Implementation
The im plem entation of the Financial Sector M asterplan
(FSM P) is w ell on track and as at 31 D ecem ber 2005,
i.e. half-w ay through the 10-year FSM P period, a total of
49 recom m endations or m ore than half of the FSM P
recom m endations w ith m ilestones have been fully
im plem ented. A nother 29 recom m endations are being
im plem ented on a continuous basis. The list of com pleted
and on-going recom m endations is in the A nnex.
Throughout the first half of the FSM P period,
significant progress w as achieved in diversifying the
financial structure including further strengthening the
position of the dom estic financial institutions to
operate in a m ore liberalised environm ent. D espite a
m ore deregulated and liberalised environm ent, the
dom estic banking institutions rem ained com petitive
and w ere able to m aintain their m arket share. A s at
end-2005, dom estic banking institutions m aintained
81.7% share of gross loans (end-2004: 81.3% ) and
80.5% share of total deposits (end-2004: 80.9% ).
Profitability levels of dom estic banks continued to
im prove, as exhibited by increases in return on average
assets and return on average equity from 1% and
11.5% in 2004 to 1.3% and 15.2% in 2005,
respectively. Productivity level also im proved further as
dem onstrated by low er cost to incom e ratio of 49% in
2005 (2004: 50% ). Boosted by stronger profitability
level and im proving cost to incom e ratio, the pre-tax
profit per RM em ployee cost of dom estic banks also
increased from RM 1.60 in 2004 to RM 1.90 in 2005.
A sset quality positions also continued to im prove,
am idst favourable econom ic conditions. N et N PL ratio
based on the 3-m onth classification declined by
1.8 percentage points to 6.4% in 2005. Benefiting
from the continued capacity building initiatives and
efforts taken by dom estic banking institutions to
further enhance their operational efficiency, several
dom estic banks have em erged stronger and becom e
perform ance leaders. These top perform ers have
further narrow ed their perform ance gap as com pared
w ith the incum bent foreign banks in all m ajor areas.
Sim ilar to the banking industry, the dom estic insurance
com panies also recorded further perform ance
im provem ents. D om estic players m aintained their
dom inant position in the general insurance sector w ith a
m arket share in gross direct prem ium s of 73.5% in
2005 (2004: 72.6% ). Supported by enhanced
underw riting capabilities and infrastructure
im provem ents w hich contributed tow ards better
underw riting results and efficiency gains, the com bined
return on equity of the larger dom estic insurers
increased to 29.8% (2004: 20.6% ). Significant
productivity im provem ents w ere also achieved w ith
gross prem ium s per em ployee increasing by m ore than
14% to RM 754,301 (2004: RM 659,184). In the life
sector, the w eaker overall grow th of life business during
the year saw the m arket share of dom estic insurers
declining m arginally to 34.8% (2004: 35.8% ) in 2005.
D om estic insurers, nevertheless, m aintained their
dom inant position in the bancassurance m arket, w ith a
share of 81.9% (2004: 82.4% ) of total new prem ium s
generated through banking institutions in 2005. The
significant grow th of the bancassurance m arket since
2003 has also seen a num ber of dom estic insurers
em erging am ong the m arket leaders, w ith several m ore
positioning them selves to take advantage of the
significant grow th opportunities to be reaped from their
banking alliances.
The Islam ic banking industry sustained its expansion in
the M alaysian banking system as indicated by the
increasing m arket share of Islam ic banking assets to
account for 11.3% (2004: 10.5% ) of the total assets in
the banking system as at end-2005. The m arket share of
deposits and financing also expanded to account for
C04 Financial Sector pg108-114 3/14/06, 9:14 PM 112
113
The Financial System
11.7% (2004: 11.2% ) and 12.1% (2004: 11.3% ) of the
total banking sector deposits and financing respectively.
D uring the year, various policy initiates w ere
undertaken tow ards strengthening further the financial
system to better support the grow ing needs of the
econom y. M easures undertaken in the banking sector,
Islam ic financial services and the developm ent financial
institutions are discussed in detail in chapters
The Banking System, The Islamic Financial System and
Development Financial Institutions of the A nnual
Report 2005. D etails on the insurance sector initiatives
w ill be covered in the Insurance A nnual Report 2005.
The M alaysian financial landscape w ill continue to
undergo structural changes given the econom ic
transform ation and the need for the financial institutions
to sustain their com petitiveness and resilience. The
entrance of new investors and financial players is expected
to inject greater dynam ism in the financial industry, thus
giving m ore incentives to attain greater perform ance
im provem ent by dom estic financial institutions. The
capacity building initiatives w ill continue to be pursued and
intensified during the rem aining Phase 2 of the FSM P
period to prepare the dom estic financial sector for further
global integration as w e m ove to the third phase of the
FSM P. G radual liberalisation m easures, including the
possibility of introducing new foreign com petition, w ill be
appropriately sequenced to ensure the achievem ent of the
desired im provem ent and, new opportunities and benefits
to the dom estic financial system w hile preserving overall
financial stability.
C04 Financial Sector pg108-114 3/14/06, 9:14 PM 113
C04 Financial Sector pg108-114 3/14/06, 9:14 PM 115
The Banking System
M anagem ent of the Banking System
White Box:Data and Systems Challenges in the
Implementation of Basel II
White Box:The Deposit Insurance System in Malaysia
White Box:Establishment of the Credit Counselling and
Debt Management Agency
White Box:Banking Measures Introduced in 2005
Perform ance of the Banking System
White Box:Malaysia's Anti-Money Laundering and
Counter Financing of Terrorism (AML/CFT) Programme
116-133
123-125
126-128
129-130
133-136
136-149
149-153
116
MANAGEMENT OF THE BANKING SYSTEM
Building on the achievem ents recorded in the preceding
years, further progress continues to be m ade in
enhancing the capacity and capability of dom estic
banking institutions. The enhanced com petitiveness of
the dom estic banking institutions provided the
foundations on w hich progressive infusion of greater
com petition could be pursued through further
deregulation and liberalisation.
In line w ith the objective of preserving financial
soundness and stability w hilst achieving the goals of
progressing into a m ore dynam ic financial system , the
m ain thrusts of policy m easures in 2005 continued to
place em phasis on enhancing the com petitiveness of
dom estic banking institutions and preserving resilience
of the financial sector. In this regard, efforts w ere
directed tow ards im proving the structural and
operational efficiency of the banking institutions w hilst
introducing a m ore dynam ic prudential regulatory
fram ew ork, w hich is com plem ented w ith effective
supervisory oversight and enhanced surveillance. O ther
key policy initiatives in 2005 included ensuring
continuous access to financing for all segm ents of the
econom y and the further enhancem ent of infrastructure
for consum er protection and education. These are in
line w ith the broad thrust of Phase 2 Financial Sector
M asterplan (FSM P) w hich aim s to elevate the overall
perform ance of the financial sector.
dow nw ard trend to 4.6% , the low est level since the
advent of the A sian financial crisis. Supported by the
strong financial position, the banking system w as w ell-
positioned to effectively support econom ic grow th as
evident from the expansion in lending activities. N ew
loan approvals and disbursem ents increased by 11.4%
and 8.4% respectively, w hilst total outstanding loans
expanded by 8.6% during the year.
The w inding up of Pengurusan D anaharta N asional
Berhad (D anaharta) in D ecem ber 2005 m arked the
successful com pletion of the final chapter in the
financial sector restructuring efforts undertaken to
address the vulnerabilities that surfaced in the afterm ath
of the A sian financial crisis. W ith financial system
stability fully restored and continued strong
perform ance by the banking sector, policies
im plem ented during the year w ere successful in
augm enting the resilience, capacity and efficiency of the
banking institutions to effectively m eet the needs of an
increasingly com petitive and dynam ic econom y.
Enhancing Structural and Operational Efficiency
The year 2005 continued to w itness a changing structural
landscape in the banking sector. Follow ing the flexibility
granted to dom estic banking groups to rationalise their
com m ercial banking and finance com pany businesses,
the industry underw ent a transform ation w hich saw the
consolidation of retail banking businesses into a single
entity. A ll ten dom estic banking groups have com pleted
the rationalisation exercise on schedule to benefit from
the stam p duty and real property gains tax exem ptions
granted by the G overnm ent w hich ended on 15 January
2006. The successful com pletion of the rationalisation
exercise allow s for m ore efficient use of the banking
groupscapital and resources, w hich in turn w ill
strengthen the potential of the entities to m eet the
increasingly m ore differentiated expectations and
sophisticated dem ands of their custom ers.
A s financial needs grow in com plexity and the
dem arcation of the roles and functions of financial
institutions becom es increasingly blurred, further
institutional transform ation continues to take shape in
the continuously evolving M alaysian financial landscape.
O ne of the strategic initiatives aim ed to further
strengthen the capacity and capability of dom estic
banking groups to contribute tow ards econom ic
transform ation and to face the challenges of
liberalisation is the developm ent of full-fledged
investm ent banks through m ergers betw een m erchant
The Banking System
Policy measures in 2005
continued to focus on
enhancing competitiveness of
domestic banking institutions,
strengthening the
infrastructure for consumer
education and protection, and
ensuring continuous access to
financing.
The banking system sustained its strong perform ance in
2005, both in term s of financial strength and
operational efficiency. The banking sector registered
RM 12.4 billion in pre-tax profit and m aintained the
risk-w eighted capital ratio (RW C R) above 13% .
N on-perform ing loans (N PLs) ratio continued its
C05 Banking System pg116-154 4/14/06, 13:27 116
117
The Banking System
U pon com pletion of the rationalisation process, an
investm ent bank w ill hold both a m erchant banking
licence as w ell as a dealers licence w hich are issued
pursuant to the Banking and Financial Institutions
A ct 1989 and the Securities Industry A ct 1983
respectively. H ence, investm ent banks w ill be
co-regulated by Bank N egara M alaysia and the
The framework for investment
banks aims to strengthen the
capacity of domestic financial
institutions to capitalise on
business opportunities,
increase competitive
advantage and widen the
range of financial and advisory
activities and thereby
strengthen their potential to
compete effectively with
international investment
banks.
banks, stockbroking com panies and discount houses.
These financial m arket interm ediaries currently
undertake and offer sim ilar products and services. The
integration w ill enhance their efficiency and
effectiveness by m inim ising duplication of resources and
overlapping of activities, leveraging on com m on
infrastructure as w ell as reaping the benefits of
synergies and econom ies of scale. It w ill also further
strengthen the potential and capability of dom estic
financial institutions to capitalise on business
opportunities, increase their com petitive advantage and
w iden the range of financial and advisory activities and
thereby strengthen their potential to com pete effectively
w ith international investm ent banks.
The em ergence of investm ent banks is aim ed at
enhancing the dynam ism and vibrancy of the capital
m arket to contribute tow ards econom ic transform ation
as w ell as enable m arket players to better face
challenges of liberalisation and globalisation.
Recognising this, the fram ew ork for investm ent banks
has been form ulated based on three m ain principles.
Firstly, the fram ew ork aim s to enhance the scope of
activities for the m erged entity w here investm ent
banks w ill also be allow ed to undertake fund
m anagem ent and unit trust businesses in addition to
the activities conducted based on the types of licences
held prior to the rationalisation. Secondly, the
fram ew ork seeks to enhance the capacity for grow th
and business expansion through industry-w ide
rationalisation. A nd finally, it aim s to m inim ise the
regulatory burden that m ay arise from dual regulatory
regim e. To facilitate the establishm ent of investm ent
banks, incentives via stam p duty and real property
gains tax exem ptions as w ell as tax credits for
accum ulated losses of the financial institutions
involved in rationalisation w ere granted to all entities
that are involved in the transform ation into investm ent
banks w ithin the given tim efram e.
Bank N egara M alaysia announced the fram ew ork for
creation of investm ent banks in M arch 2005. U nder the
fram ew ork, an investm ent bank can be form ed via
various m erger perm utations, nam ely, via m erger of
m erchant bank and stockbroking com pany w ithin the
sam e banking group or m erger of tw o stand-alone
discount houses w ith a stockbroking com pany. To
further enable the developm ent of a m ore resilient,
com petitive and dynam ic financial system , the
fram ew ork w as extended to allow universal brokers to
be transform ed into an investm ent bank, via the
acquisition of a discount house. A ll financial groups
have been given up to 30 June 2006 to undertake the
rationalisation exercise.
Securities C om m ission. Tow ards this end, a clear
dem arcation of roles betw een the tw o regulators
has been established. The C entral Bank w ill be
responsible for the prudential regulations governing
the investm ent banks to ensure that the safety and
soundness of the financial system rem ains intact, as
w ell as to protect the interest of depositors. The
Securities C om m ission w ill be responsible for the
business and m arket conduct of investm ent banks in
order to prom ote m arket integrity and provide
investor protection. To attain these objectives, Bank
N egara M alaysia and the Securities C om m ission are
currently finalising the details of a M em orandum of
U nderstanding w hich outlines all specific aspects of
the cooperation and consultation betw een the tw o
regulators to ensure sm ooth and efficient
coordination of roles and responsibilities w ith
respect to the supervision and regulation of
investm ent banks. Further to this, to ensure that the
investm ent banks are m anned by capable and
com petent w orkforce, all personnel undertaking
functions related to dealing in securities, fund
m anagem ent, investm ent advice, and futures
activities are required to pass the relevant
exam inations and be licensed as representatives
prior to undertaking such activities, as im posed by
the Securities C om m ission.
C05 Banking System pg116-154 3/14/06, 9:14 PM 117
118
Bank N egara M alaysia and the Securities C om m ission
had on 1 July 2005, jointly issued the Guidelines on
Investment Banking w hich details the requirem ents
and processes to set up investm ent banks as w ell as
the regulatory fram ew ork w ithin w hich investm ent
banks w ould operate. Policies w ere form ed taking into
consideration the inherent risks of the new ly m erged
entity and the international regulatory fram ew ork for
investm ent banks. The G uidelines set a m inim um
capital funds unim paired by losses at RM 2 billion on a
group basis, for investm ent banks that are part of a
dom estic banking group and RM 500 m illion for stand-
alone investm ent banks. These stand-alone investm ent
banks have to com ply w ith the m inim um capital funds
requirem ent by 31 D ecem ber 2008, failing w hich they
w ould be granted a restricted licence w hich excludes
the ability to undertake deposit-taking activities.
Investm ent banks w ill also be subjected to the
Investment Bank Capital Adequacy Framework (IBC A F),
w hich is based on the existing capital adequacy
fram ew ork applicable to banking institutions. A ll
investm ent banks, except stand-alone investm ent
banks that do not fulfill the m inim um capital funds
requirem ent, w ill be allow ed to m obilise deposits w ith
a m inim um size of RM 500,000. N evertheless, it is
envisaged that in the longer term , the investm ent
banks w ould increasingly tap the capital m arket to
m eet their funding needs. Recognising that the
participation of foreign investors can provide an
im petus tow ards enhancing the capacity and efficiency
of dom estic institutions through the transfer of skills,
expertise and technical know -how as w ell as providing
access to international tie-ups, and in line w ith the
gradual liberalisation approach adopted in M alaysia,
the lim it for foreign equity participation in investm ent
banks has been set at a higher level of 49% .
A s outlined in the FSM P, one of the key strategic
initiatives tow ards enhancing the capacity and capability
of dom estic banking institutions is through the gradual
introduction of a m ore com petitive environm ent to act as
a catalyst tow ards perform ance im provem ent. A s players
in the financial system , the locally-incorporated foreign
banking institutions (LIFBs) have contributed significantly
to the developm ent and vibrancy of the financial sector
through capital investm ent, creation of em ploym ent
opportunities, facilitation of econom ic activities as w ell as
transfer of skills and technology. Supported by extensive
research capability and international operations netw ork,
the LIFBs have and continue to introduce new business
m odels, using inform ation technology to enhance their
risk m anagem ent and delivery channels, and set the bar
for custom er service quality. This has had spillover effects
on the dom estic financial institutions. This, coupled w ith
the diagnosis of their areas of strengths and w eaknesses,
and areas requiring further perform ance im provem ents
under the benchm arking exercise, have resulted in an
overall im provem ent of the dom estic banking institutions
w hich in turn has contributed tow ards the enhancem ent
of banking services in the country.
W ith the strengthened com petitiveness of the
dom estic banking institutions, the LIFBs w ere granted
w ith greater flexibility through the establishm ent of up
to four additional branches. G iven that dom estic
banking institutions have a large presence in non-
urban areas to fulfil the socio-econom ic objective of
ensuring that rural areas have sufficient access to
banking services and to further enhance the dispersion
of bank branches across the country, the flexibility
granted are subjected to a predeterm ined ratio of the
additional branches in the m arket centres, urban areas
and non-urban areas.
In line w ith efforts to further enhance the ability to
provide a com prehensive range of innovative financial
products and services to com pete m ore effectively in the
m arketplace, banking institutions have forged strategic
alliances w ith other types of local and foreign financial
institutions. This m ove has brought about the grow th of
bancassurance, asset and w ealth m anagem ent activities,
as w ell as provided platform s for trade in foreign
equities, fixed incom e securities and unit trusts. Further
to this, m any banking institutions have also capitalised
on the flexibility accorded to outsource their non-core
operational functions as a m eans tow ards achieving
greater operational efficiency. The outsourcing functions
are carried out by third party service providers or by
specially established subsidiaries to provide services to
entities w ithin banking groups. In tandem w ith the
global trend tow ards outsourcing, M alaysia has also
benefited from the establishm ent of regional processing
and outsourcing centres in the country w hich serve the
region. This stem s from the presence of conducive
business environm ent, skilled w orkforce, strong global
exposure and low set up cost in M alaysia. To date, four
foreign banking institutions have set up regional
processing centres in M alaysia w ith the total investm ent
am ounting to RM 343.1 m illion w hilst 5,243 jobs have
been created as at end-D ecem ber 2005. There has also
been grow ing interest by other foreign partners,
including non-banking entities to set up business
process outsourcing centres in the country to serve their
regional and global operations.
To facilitate greater product innovation, banking
institutions w ere accorded greater flexibility w ith respect
to the offering of investm ent-linked to derivative (ILD )
C05 Banking System pg116-154 3/14/06, 9:14 PM 118
119
The Banking System
products. The revised Guidelines on Offering of
Investment-Linked to Derivative Products, w hich w as
issued in A pril 2005, enabled banking institutions to
structure ILD products on any asset class, subject to the
aggregate notional am ount not exceeding 100% of its
capital base. Previously, this requirem ent w as
accom panied by additional restriction of notional
am ount not exceeding 30% of capital base on each
approved asset class. The revised G uidelines also
allow ed banking institutions to offer Ringgit-
denom inated ILD products linked to foreign asset
classes. Further to this, the offerings of non-principal
protected ILD products to investors are also allow ed, as
long as the risks of the product are clearly highlighted
and investors are inform ed that their m axim um loss
potential is lim ited to the am ount of principal invested.
A dditionally, the approval period for ILD products w as
reduced from 21 days to 14 days to enable faster tim e-
to-m arket. In line w ith ongoing efforts to augm ent
grow th and m arket reach of ILD products in M alaysia, in
February 2006, the Bank further liberalised various
requirem ents of the earlier G uidelines. U nder the latest
revision, the lim it on the aggregate notional am ount of
the ILD products offered by banking institutions w as
rem oved, thus enabling banking institutions to engage
in ILD products w ith greater flexibility. In addition, to
accord banking institutions w ith greater operational
efficiency, the products offered are deem ed to be
approved upon subm ission to Bank N egara M alaysia,
subject to m eeting all conditions as stipulated in the
G uidelines, w hich covered aspects of risk m anagem ent,
product characteristics, product m arketing and
classification as w ell as disclosure requirem ents and
regulatory com pliance.
To further enhance consum ersaccess to a w ider array
of financial services that are offered by com m ercial
banks, additional flexibility w as granted in A ugust 2005
to enable com m ercial banks to conduct factoring
services either w ithin their bank or through a separate
entity. The separate legal entity can be in the form of a
fully- or partially-ow ned subsidiary or a joint venture
w ith any other parties, including foreign parties.
G iven the increasingly dynam ic and com petitive
operating environm ent, the banking sector is
continuously challenged to im prove their operational
efficiency and risk m anagem ent practices. This includes
m anaging their loan portfolio effectively and efficiently.
To provide banking institutions w ith greater flexibility
and options in m anaging their exposures, the Bank had,
in D ecem ber 2005, issued the Guidelines on the
Disposal/Purchase of Non-Performing Loans by Banking
Institutions. W ith the issuance of the G uidelines,
banking institutions are now able to sell outright their
N PLs to eligible third parties, nam ely dom estic banking
institutions, LIFBs, dom estic and foreign investors.
A dditionally, banking institutions are also allow ed to
purchase N PLs from other banking institutions. W ith this
flexibility, banking institutions are accorded w ith an
additional option to m anage their balance sheets and to
reallocate resources tow ards strengthening their
business potential and to generate higher rates of
returns. It also enables banking institutions to undertake
greater product innovation and releases resources for
higher investm ents in hum an capital developm ent and
technological infrastructure, rather than m anaging
distressed assets. To ensure that the flexibility does not
expose undue risk to the participating banking
institutions, the banking system and the consum ers, the
flexibility is subjected to certain general conditions and
prudential requirem ents. O ne such general condition
includes the requirem ent for the sale and purchase of
N PLs to dom estic or foreign investors w hich are not
licensed institutions under the Banking and Financial
Institutions A ct 1989, to be conducted via a locally-
incorporated special purpose vehicle (SPV) w ith foreign
equity participation capped at 49% ; aim ed at nurturing
and grow ing the local asset m anagem ent industry. To
ensure the proper conduct of the sale of N PLs, the
G uidelines also set out the broad roles and
responsibilities of the board of directors and senior
m anagem ent, as w ell as the legal requirem ents and
regulatory processes to undertake such activities.
The availability of a highly com petent w orkforce that is
custom er centric, technology-savvy, flexible and agile in
the evolving financial sector w ill increasingly be the
defining factor in determ ining the success of an
institution and ultim ately contribute tow ards building a
m ore resilient and dynam ic financial sector. In view of
this, continuous enhancem ent to hum an capital
resources and intellectual capabilities is critical to drive
the perform ance of the financial sector, in particular the
banking industry. The International C entre for
Leadership in Finance (IC LIF) continued to be com m itted
to providing leadership developm ent program m es for
leaders in the financial services sector. In 2005, IC LIF
conducted tw o sessions of its G lobal Leadership
D evelopm ent Program m e under its structured advanced
leadership program m e as w ell as various specialised
learning program m es on scenario planning and strategic
thinking, leading change, leadership innovation and the
directorsforum .
In addition, as part of the strategic plan to form ulate
enhanced training and educational portfolios intended
to upgrade skills and sharpen com petencies as w ell as
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enhance m anagerial and organisational capabilities of
the banking industry w orkforce to m eet future
challenges, Institut Bank-Bank M alaysia (IBBM ) is
currently developing a Banking and Finance Industry
Competency Framework. The fram ew ork w ill provide
the foundation to guide IBBM in the design of relevant
technical program m es and assist institutions of higher
learning to align their curriculum in order to m eet the
industrys hum an resource needs for a pool of highly
talented professionals. Further to this, the fram ew ork
consists of tw o key output, nam ely, the core
com petency, w hich com prises the key know ledge, skills
and attitudinal attributes required for bankers and the
technical com petency, w hich outlines the expected
technical know ledge, skills and attitudinal attributes
required for key tasks in the m ajor banking sectors. In
form ulating the fram ew ork, IBBM had conducted a
high-level focus group discussion in D ecem ber 2005 to
deliberate on the C ore C om petency Fram ew ork. The
focus group discussion w as participated by chief
executive officers of m ajor banking institutions and
leading academ icians. The discussion contributed
tow ards the gathering of holistic and balanced input
and insights necessary to refine the C ore C om petency
Fram ew ork and form the foundation for further w ork
on the technical com petency phase.
C ontinuing efforts to ensure a steady supply of highly
com petent graduates in the banking and finance
industry led to the signing of a M em orandum of
U nderstanding (M oU ) betw een IBBM and U niversiti
M alaya on 21 July 2005. The M oU w ill pave the w ay
tow ards the developm ent and enhancem ent of
know ledge and skills of undergraduates pursuing
specialisation in banking and finance through the
enhancem ent of the banking and finance program m e
by the U niversity as w ell as industrial attachm ents or
internship opportunities at banking institutions for the
undergraduates. The strategic partnership offers an
opportunity for both entities to build on each others
strengths for the com m on objective of enhancing the
quality of the w orkforce in the banking industry.
Promoting Banking System Soundness and
Stability
The presence of a sound and stable financial system is
key in achieving sustainable econom ic grow th and
prosperity. U nder the continuously evolving financial
landscape and global integration of financial m arkets, it
is critical for the financial system to rem ain responsive
and capable in m anaging the m ultitude of risks that
arise. A s such, due attention continued to be accorded
tow ards ensuring that the fundam ental elem ents of a
safe and sound financial system rem ain intact. These
include having a com prehensive and effective
m onitoring and surveillance fram ew ork, the presence of
strong and dynam ic prudential regulations and
supervisory oversight, as w ell as having an efficient
financial infrastructure and reliable financial safety nets.
D uring the year, efforts continued to be directed to
further strengthen the surveillance of the banking system .
The ability to detect and assess em erging vulnerabilities is
critical in order to deploy appropriate policy m easures to
prevent or contain em erging risks in a tim ely m anner. In
this regard, initiatives continued to be undertaken
tow ards m onitoring and assessing the resilience of the
banking system using a com bination of relevant financial
and m acroeconom ic indicators, qualitative inform ation as
w ell as on- and off-site surveillance. Throughout the year,
dom estic m acroeconom ic and financial m arket
developm ents and their linkages, the financial system
perform ance and their im plications on financial system
stability; the perform ance of specific econom ic sectors,
including the household and corporate sectors and their
im plications on the banking system , as w ell as potential
im pact of regional or global developm ents on the health
of the M alaysian banking system w ere m onitored and
assessed. In addition, efforts to develop the capability and
tools for a m ore com prehensive surveillance fram ew ork
both at the system and institution levels, to identify,
m easure, assess and predict em erging vulnerabilities are
currently underw ay. These include form ulating
appropriate m ethodologies for the m odels and
enhancing the dataset used for m odelling. Further to this,
the fram ew ork on stress testing is currently being
review ed and enhanced to provide guidance to the
banking institutions on the im plem entation of stress
testing as a risk m anagem ent tool w ithin the institutions.
The revised guidelines on stress testing w ill accord
banking institutions w ith the flexibility to develop or
adopt stress tests that are m ost appropriate and effective
for their respective business m odels. Instead of
prescribing fixed param eters for conducting the stress
tests, banking institutions w ill identify the risk factors or
characteristics w hich com m ensurate w ith the nature of
their activities, scale of their risk factors and their risk
m anagem ent infrastructure.
The supervisory activities undertaken in 2005 w ere also
prem ised on the objective of prom oting financial
soundness and banking system stability to support the
Banks vision of having in place a dynam ic, com petitive
as w ell as a stable banking system . The Bank continued
w ith a supervisory approach w hich focused on
continuous surveillance to ensure safety and soundness
of the banking institutions and undertaking pre-em ptive
m easures to contain em erging risks in a tim ely m anner.
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The Banking System
A ttention w as accorded tow ards the identification of
significant business activities of the banking institutions,
assessing the key risks in each significant business
activity and the capability of the banking institutions
concerned in m anaging these risks. A com prehensive
approach to supervision of financial groups w as carried
out to evaluate the capacity and capability of the
groups risk m anagem ent and internal control system s.
Bank holding com panies and other risk-taking entities
w ithin the group w ere also assessed to facilitate early
identification of possible contagion risks to banking
institutions w ithin the group. This w as further supported
by inform ation obtained from other regulators, both
dom estic and international, to provide a holistic
assessm ent of financial groups.
Recognising the im portance of inform ation system s (IS) in
the banking business particularly w ith respect to risk
m anagem ent, product developm ent and delivery of
custom er service, it is im perative that the integrity and
robustness of IS are m aintained. In this regard, supervisory
initiatives w ere focused not only on security and control
aspects of the IS environm ent, but also the governance of
IS activities by the board of directors and senior
m anagem ent. In cases w here m ost of the IS operations of
the banking institution w ere outsourced to service
providers, the scope of exam ination w as also extended to
these service providers. This is to ensure that banking
institutions have adequate oversight over the services
extended by their service providers and that the standards
adopted by the service providers w ere on par, if not better,
than the standards applied to the in-house IS environm ent
of banking institutions.
The m inim um requirem ents and standards for planning and
m anaging IS environm ent and for establishing IS risk
m anagem ent m easures w ere specified in the Guidelines on
Management of IT Environment w hich w as issued in M ay
2004. In the course of carrying out on-site exam inations in
2005, it w as observed that m ost banking institutions have
either com plied w ith these m inim um standards, or w ere
m aking substantial progress in that direction. Som e banking
institutions had also put in place m ore stringent controls,
consistent w ith the size and com plexity of their respective IS
environm ent. In 2005, the Bank also continued its efforts to
strengthen the resilience of the M alaysian financial system in
the event of unexpected developm ents. The requirem ents
for banking institutions to form ulate a Business Resumption
and Contingency Plan (BRCP) and on its testing w ere also
prescribed in the G uidelines.
Effective corporate governance practices that enhance
corporate accountability are key elem ents in the w orking of
m arket discipline and transparency. In line w ith the
m ove tow ards a principle-basedregulatory fram ew ork,
greater responsibility is placed on the shareholders and
boards of banking institutions to ensure that their
institutions operate in a sound and safe m anner, w ithin
the param eters set by the Bank. The adoption of sound
corporate governance standards and practices ensures
that licensed institutions are m anaged in a safe and
sound m anner w ith appropriate balance betw een risk-
taking activities and business prudence so as to
m axim ise returns to shareholders w hilst protecting the
interests of all stakeholders. To steer the banking sector
tow ards this objective, the Bank had issued the
Guidelines on Corporate Governance for Licensed
Institutions (Revised BNM/GP1) in Septem ber 2005 to
replace the Guidelines on Directorship in Banking
Institutions (GP1). The revised G uidelines w ere
form ulated based on the fundam ental concepts of
responsibility, accountability and transparency. It also
contains broad principles relating to board m atters,
m anagem ent oversight and audit.
The revised G uidelines place significant em phasis on a
boards roles and responsibilities for proper stew ardship
of its institution as w ell as to ensure that the policies and
procedures adopted by the banking institution are sound
and prudent, and are adhered to at all levels of the
organisation at all tim es. This is achieved via rigorous and
diligent oversight over the licensed institutions functions
and affairs, w hich include ensuring that the institution
establishes com prehensive risk m anagem ent policies,
processes and infrastructure as w ell as an effective
internal audit review process. The board is also charged
w ith the task of establishing corporate values, visions and
strategies that w ill guide the activities of the licensed
institution as w ell as being aw are of the types of m aterial
financial activities pursued by the institution. The roles of
independent directors w ere also enhanced to provide
essential independence and objectivity to the board,
ensure effective check and balance as w ell as m itigate
any possible conflicts of interest. The supervisory
approach and m ethodology adopted, w hich included
interview s and assessm ents of individual directors
perform ance has contributed tow ards better corporate
governance. There w as m ore active participation am ong
directors and increase in aw areness on the expectations
on board m em bers in overseeing the operations of a
licensed institution.
O ther salient features of the revised G uidelines include a
clear dem arcation of roles betw een the chairm an and
the chief executive officer (C EO ), as w ell as a clear
separation betw een shareholders and m anagem ent of
the licensed institution. These are aim ed at ensuring an
appropriate balance of role, responsibility, authority and
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accountability am ong the decision m akers as w ell as not
to im pede the practice of sound corporate governance.
A dditionally, to ensure effective leadership, fit and
proper standards for directors and senior m anagem ent
w ere further tightened, taking into consideration factors
w hich include com petency, character, integrity and
probity of the individuals. This is to enhance the level of
com petence and capability of the board as a w hole in
order to effectively discharge its duties to oversee and
actively contribute to the overall strategic and
operational direction of their banking businesses. G iven
the critical roles of the deputy C EO and chief financial
officer in a licensed institution, the revised G uidelines
specified that the Bank w ill com plem ent the N om inating
C om m ittee of the licensed institution by conducting
lim ited vetting on the proposed candidates for the
respective positions to ensure that only qualified
individuals filled those positions.
In an effort to further im part and enhance know ledge of
directors of financial institutions on corporate governance
issues, IBBM had conducted a Directors Programme on
the Recent Revised Corporate Governance Guidelines in
N ovem ber 2005. The objective of the program m e w as to
keep board m em bers w ell inform ed of the corporate
governance objectives and standards w hich w ould add to
their effectiveness w hile discharging duties and
responsibilities.
In preparation for the im plem entation of Basel II,
banking institutions conducted detailed gap
assessm ents in 2005 to assess their readiness to adopt
the new capital adequacy fram ew ork. The results of
these assessm ents that w ere subm itted to the Bank had
provided valuable insights on industrys aspirations and
key challenges faced in im plem enting Basel II. W hile
m ost banking institutions did not foresee m ajor
problem s adopting the standardised approach beyond
system enhancem ents, m any of them highlighted that
the low level of penetration of external ratings w ould
lim it the potential benefits to be derived from the
Standardised A pproach.
The gap assessm ents w ere follow ed by a series of
bilateral discussions that w as also used by the Bank as
input in the form ulation of the detailed supervisory
guidance. These supervisory guidance, to be issued in
2006, w ould specify the design and areas of
custom isation under both the Standardised and Internal
Ratings Based (IRB) approaches for credit risk. For the
Standardised A pproach, the detailing and custom isation
of the fram ew ork w ould involve the review of specific
param eters such as the risk-w eight m apping and
supervisory collateral haircuts to ensure that they reflect
local experience, and produce capital requirem ents that
are com parable to those banking institutions under the
IRB approach for sim ilar types of risk being undertaken.
Sim ilarly, the appropriateness of exercising national
discretions needs to be assessed thoroughly such that
the discretions w ould not substantially reduce the risk
sensitivity of the fram ew ork.
A s for the IRB approach, the focus has been on the
interpretation of the operational requirem ents under
the approach w here sufficient consideration is
needed on prom oting the adoption of global best
practices am ongst dom estic banking institutions.
W hile the adoption of global best practices w ould
be the desired long-term objective, setting these
practices as the m inim um benchm ark m ay prove to
be unrealistic and hence discourage m igration to the
IRB approach. A key elem ent in the process of
developing the IRB industry guidance is balancing
the need for specific technical details and applying a
principle-based fram ew ork in areas w here m arket
practice is still evolving. G uidance that are too
prescriptive m ay result in banking institutions being
confined to requirem ents w hich m ay not be
appropriate for their business m odels.
The concept papers to be issued by the Bank in
2006 w ould also discuss on the im plem entation of
the Basic Indicator A pproach and Standardised
A pproach for operational risk. The results of an
operational risk survey conducted by the Bank
during the year revealed that m any banking
institutions have already put in place an operational
risk m anagem ent fram ew ork and have initiated
operational risk data collection efforts. G uidelines
on sound operational risk m anagem ent practices
w ould be issued in 2006 as a foundation for
im proving the overall level of operational risk
m anagem ent in the industry.
The Guidelines on Corporate
Governance for Licensed
Institutions places significant
emphasis on Board oversight,
the role of independent
directors and the clear
separation between
management and
shareholders of banking
institutions.
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The Banking System
Data and Systems Challenges in the Implementation of Basel II
The com plexity of Basel II continues to pose challenges in the im plem entation of the new capital adequacy
standards am ong banking institutions and bank supervisors in the global financial system . Im plem entation
issues and challenges have been w idely discussed as banking institutions and bank supervisors seek to learn
from each othersknow ledge and experience. O ne area that had attracted w ide attention is the data and
system readiness of banking institutions as they m ove closer tow ards the im plem entation deadline of Basel II in
their respective jurisdictions. Indeed, the credibility of the m odelling process of the various risk param eters and
hence the com putation of m inim um capital under Pillar 1 of the new accord depends very m uch on the quality
of data and system architecture and infrastructure established by the banking institutions.
U nderlying the com plex regulatory requirem ents of Basel II is the expectation for banking institutions to have in
place, robust system s and data m anagem ent infrastructure that w ould enable sound risk m anagem ent
processes. A fundam ental aspect of this is an enhanced data infrastructure that w ould allow banking
institutions to extract inform ation across the various system s in a consistent and tim ely m anner. This w ould
include having the capability to obtain a single and consolidated view of their borrow ers or group of borrow ers
that enables effective m onitoring of borrow ers and segm entation of exposures into appropriate portfolios
according to their risk profile. W hile m ost banking institutions have already captured the inform ation on the
various credit exposures of their borrow ers, this inform ation often resides in database system s w hich are not
fully integrated. H ence, the process of extracting consolidated view of borrow ers and obligors w ould be
exposed to errors and inefficiency such as data inconsistencies and duplications. System s integration that is
required involves standardising the custom er identifier of each borrow er and firm ly establishing the linkages
betw een borrow ers and all their related parties and the exposures to these parties. To obtain an accurate risk
profile of the various credit facilities granted to a borrow er or group of borrow ers, system s that m aintain
inform ation on the borrow er and the related credit facilities m ust also be fully integrated w ith the collateral
m anagem ent system .
The integration of the various system s capturing inform ation related to the borrow er w ould not only provide a
strong foundation for an effective credit risk m anagem ent system but also support a m ore efficient business
decision m aking process. W ith enhanced capacity to m onitor their respective borrow ers, banking institutions
w ould be able to prom ptly detect any deterioration in the creditw orthiness of the borrow er or its related
parties. The integration w ith the collateral m anagem ent system s w ould also facilitate a m ore effective
m onitoring of collateral perform ance, particularly financial securities. Effective m onitoring of such collateral
w ill ensure that any reduction in their value w ould allow banking institutions to undertake appropriate action
to m itigate the resulting increase in risk. A t the borrow er level, the overall view of the custom er w ould
enhance the ability of banking institutions to assess custom er profitability, thus facilitating the m arketing of
new products to these custom ers. W ith the enhanced infrastructure, banking institutions w ill also be in a
better position to undertake better product pricing, m ore accurate custom er and portfolio profitability analysis
and m ore effective portfolio risk m anagem ent. From a strategic perspective, such inform ation could also be
used as vital inputs for the developm ent of the banksfuture business expansion strategy to the m ore profitable
segm ents.
Besides system s capability, the acceptability of internal estim ates of the various risk drivers such as the
Probability of D efault (PD ), Loss G iven D efault (LG D ) and Exposure at D efault (EA D ) for the com putation of
capital adequacy under the Internal Ratings Based (IRB) approaches w ould be dependent on the quality and
adequacy of input data used by the banking institutions in the m odelling process. Lack of data could
potentially result in a m odel that is not adequately robust to provide consistent results for the purpose of
capital com putation. There w ould also be difficulties in validating the m odel if the sam ple size of defaulted
borrow ers is either too sm all or have not been appropriately captured. The requirem ent for data that covers a
full econom ic cycle that is typically a m inim um period of ten years, for purposes of m odelling the risk drivers
also poses a challenge for banking institutions. In this context, a key consideration for banking institutions and
supervisors in A sia w ould be to deal w ith the im pact of abnorm ally high default incidences and loss rates
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during the period follow ing the A sian financial crisis in 1997-1998. W hile the im pact w ould dissipate naturally
as banking institutions populate their database w ith new data over tim e, banking institutions w ould still need
to com e to agreem ent w ith their supervisor on the adjustm ent m ethodology to norm alise the im pact of the
crisis data during the initial period of Basel II im plem entation. The objective is to ensure that the regulatory
capital is neither understated relative to the actual risks nor too excessive that it becom es very costly for the
banking institutions to conduct their business.
In the context of delivering good m odel perform ance, the data collection process is equally im portant in
ensuring data quality. Sound data m anagem ent processes and procedures are critical to ensure that data is
consistently captured and sufficiently accurate. C entral to this is the need for banking institutions to establish
clear lines of authority and accountability in ensuring that high data quality and integrity standards are
observed at all tim es. This can only be achieved in an environm ent w here the im portance of having sound data
quality m anagem ent practices is acknow ledged both by the top leadership as w ell as the various business units
w ithin the banking institutions.
G iven the intensity of the internal data requirem ents under the advanced approaches for the com putation of
capital requirem ents for credit and operational risk, there has been a tendency to overlook the im portance of
external data in the im plem entation of Basel II. In general, external data such as the default studies published
by external credit assessm ent institutions (EC A Is) as w ell as external credit and operational loss databases m ay
provide useful insights and be used to facilitate the adoption of the advanced approaches. In the context of
corporate credit m odel developm ent in particular, default and credit m igration studies from EC A Is m ay provide
valuable input for purposes of benchm arking the output of the m odels w ith the experience of EC A Is w ith local
corporates. The default experience of the EC A Is w hich are usually publicly available m ay be useful for banks to
validate the appropriateness of their m odel output. The default studies published by the EC A Is can also
facilitate the calibration of PD estim ates to the internal rating scales. Banks intending to adopt the IRB
approaches have been provided the option to m ap their internal ratings w ith the rating scales used by EC A Is
and subsequently attach the PD estim ates attributed w ith the rating scale to their rating grades. N evertheless,
an im portant consideration in this process is for banking institutions to ensure the consistency and relevance of
these external data to their ow n internal portfolio, both in term s of rating definition and criteria.
The EC A I ratings also act as an indicator of the relative riskiness of a corporate borrow er under the
Standardised A pproach and are therefore used as the basis for the capital com putation. W hile this m ay be
appropriate in m any developed countries w ith high rating penetration, default inform ation associated w ith
EC A I ratings in em erging m arkets could be am plified by the sm aller sam ple size of rated borrow ers. The result
of these structural constraints m ust therefore be taken into account by both banks and regulators in em erging
m arkets w hen EC A I ratings are used for purposes of risk m anagem ent and capital com putation. In this
context, the pooling of ratings inform ation am ongst regional EC A Is should be explored by regional supervisors
as a long-term initiative to enhance the credibility of external ratings as the basis for the capital com putation
under the Standardised A pproach.
G iven the significance of having robust data and system s infrastructure for the successful im plem entation of
Basel II, Bank N egara M alaysia w ill be issuing industry guidance on data quality m anagem ent and m anagem ent
inform ation system s in 2006. W hilst the guidelines w ill be outlining broad supervisory expectations relating to
data integrity and effective m anagem ent inform ation system w ithin banks, the expectations w ould be the basis
for m ore specific data requirem ents to be issued by the Bank for Basel II im plem entation. In particular, the
guidelines w ill be used by the Bank in its pre-validation assessm ent on data and system s capabilities for
effective Basel II im plem entation.
In an effort to facilitate industry Basel II im plem entation efforts on data, the Bank is also exploring other
industry-w ide initiatives that can be undertaken to accelerate the progress m ade by banks. In this regard, the
possibility of leveraging existing infrastructure like the C entral C redit Reference Inform ation System (C C RIS) and
the Fraud Inform ation D atabase System (FID S) w ould be explored. The central credit repository system such as
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The Banking System
the C C RIS could be enhanced w ith a single borrow er group identifier m echanism to facilitate the m onitoring of
risk concentration on borrow ers and their related parties. The inform ation could be shared and used by all
banking institutions as benchm arks to ensure that inform ation on borrow ers and their related parties captured
internally are accurate. The C C RIS could also be further enhanced w ith the inclusion of ratings on banking
institutionscorporate custom ers, thus facilitating supervisory surveillance and the assessm ent of the robustness
of internal ratings system s am ong banks.
A n industry-w ide collection of data on operational risk losses is another initiative w here the Bank sees potential
benefits for the industry over the long-term . In M alaysia, the existing platform such as FID S for the capturing
of industry data on fraud is only a sm all portion of operational risk loss data that w ould be required by banking
institutions for the m odelling of operational risk. G iven the tim e taken to develop a m eaningful operational
risk database, the possibility of developing an expanded operational loss database at the national or even at
regional level should be explored by banking institutions and supervisors to support further developm ent in
operational risk m anagem ent w ithin the A sia-Pacific region.
From a capacity building perspective, the need to ensure and m aintain a high standard of data quality and
system capability is not confined to banking institutions. Supervisors w ill also need to reassess their existing
reporting infrastructure from banks given the extensiveness of data required for purposes of m ore rigorous
supervisory m onitoring and risk assessm ent. W hile there w ould be a need to enhance the supervisory reporting
fram ew ork to m eet this objective, the challenge for supervisors w ould be to raise the supervisory reporting
standards w ithout putting undue and unnecessary burdens on the banking industry. For Bank N egara
M alaysia, investm ent in data and system capability w ould com plem ent the continuing efforts and investm ent to
develop specialised skills and expertise for the assessm ent of banksinternal m odels and risk estim ates. The
risk specialists assessm ent w ould be a fundam ental basis for m aking supervisory judgm ents on the credibility
and robustness of the capital calculation process under Basel II environm ent.
D uring the year, the Bank also engaged a series of
discussions w ith local external credit assessm ent
agencies (EC A Is) in its process to finalise the criteria
for recognition of EC A Is for the im plem entation of the
Standardised A pproach. O n the international front,
Bank N egara M alaysia continued to participate in active
dialogues w ith hom e supervisors of foreign banking
institutions to gain greater clarity on the approaches
undertaken by these regulators w hilst forging greater
cooperation w ith them for the im plem entation of Basel
II. The Bank has been particularly involved in the w ork
of the Executive M eeting of East A sia Pacific (EM EA P)
W orking G roup on Banking Supervision, focusing on
Basel II related issues that are com m on am ong m em ber
countries, such as the recognition of EC A Is and hom e-
host issues relating to the validation of internal m odels.
In addition to the initiatives that are being carried out
tow ards preparing for the adoption of Basel II, continued
efforts are also being channelled to strengthen the risk
m anagem ent practices of the industry. As banking
institutions undertake m ore investm ent, trading and
hedging activities, it becom es increasingly essential for
them to take into account the im pact and potential effects
of m ovem ents in the financial m arket. In this regard and to
com plem ent the Basel II initiatives, the im plem entation of
the Market Risk Capital Adequacy Framework (MRCAF)
w hich w as issued in Septem ber 2004, took effect in April
2005. This represented a significant shift tow ards explicit
provision of regulatory capital for potential losses arising
from activities that expose banking institutions to m arket
risk. Further to this, the recent period has w itnessed a
significant expansion in loans extended by banking
institutions for the purchase of residential properties. To
ensure that such expansion is undertaken in a prudent
m anner and that sufficient capital is m aintained to support
this increased exposure, the risk-w eight im posed on
housing loans secured by first charge that have turned
non-perform ing w as increased from 50% to 100% . In
addition to the regulatory changes, the Bank also focused
its supervisory resources on assessing the adequacy of risk
m anagem ent system s and m arket conduct practices in
household lending. Despite the incorporation of m arket
risk capital requirem ents into the existing RW CR
fram ew ork and the increased risk-w eight for housing loan
NPLs, banking institutions rem ained sufficiently capitalised
w ith the RW CR m aintained at levels w ell above the
m inim um requirem ent of 8% .
In recent years, banking institutions have begun to
engage in m ore credit derivative transactions to hedge
them selves against counterparty risks and to reduce
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capital requirem ents w ithout affecting their existing
com m ercial relationship w ith the counterparty. In tandem
w ith efforts to prom ote sound risk m anagem ent practices
by banking institutions, Bank N egara M alaysia had issued
the Guidelines on Regulatory Treatment for Credit
Derivatives Transactions in Septem ber 2005 w hich specify
prudential rules and regulatory capital treatm ent for the
four m ost com m on types of credit derivative products,
nam ely, the credit default sw ap, first-to-default basket,
total rate of return sw ap and credit-linked notes. The
regulatory capital treatm ent aim s to ensure sufficient
allocation of capital by banking institutions, either in their
position as buyers or sellers of the credit derivative
products. In addition, the products offered m ust be
subject to approval by the Bank and be supported by a
robust risk m anagem ent fram ew ork.
Enhancing Infrastructure for Consumer Protection
and Further Promotion of Consumer Education
In 2005, the thrust of the initiatives on consum er
protection and education continued to be directed
tow ards em pow ering consum ers to be better positioned to
take responsibility for their ow n w ell-being. The strategies
adopted w ere tw o-pronged. Firstly, strengthening the
consum er protection regulatory infrastructure and
secondly, enhancing consum er education initiatives.
O ne of the key elem ents in building the foundation for an
effective consum er protection as outlined in the FSM P is the
setting up of an explicit deposit insurance system . Follow ing
the com pletion of the developm ent of a deposit insurance
fram ew ork w hich culm inated in the passing of the M alaysia
Deposit Insurance Corporation Act 2005, the M alaysia
Deposit Insurance Corporation (M DIC) com m enced its
operations in Septem ber 2005. This significant m ilestone
m arked a change in the approach tow ards providing
protection to depositors and augured w ell w ith the
continuous objective of enhancing the financial soundness
of banking institutions through the prom otion of sound
financial, business and risk m anagem ent practices.
U nder the deposit insurance system , explicit deposit
protection is provided to eligible deposits up to the
prescribed lim it of RM 60,000 per depositor, per m em ber
institution. This am ount is inclusive of principal and
interest. A separate coverage of the sam e am ount is
provided for Islam ic deposits, accounts held under joint
ow nership and trust accounts, sole proprietorships and
partnerships. It is envisaged that the level of coverage
w ill provide full protection for up to 95% of depositors.
In addition to its payout function, the M D IC w ill also,
under certain specific circum stances, undertake the
resolution of banking institutions, w hen the need arises.
Another central objective of consum er protection is to
ensure that consum ers are not disadvantaged am idst the
m ove tow ards a m ore m arket-driven financial sector. In
strengthening consum er protection, efforts w ere directed
tow ards ensuring that the public continue to have access to
basic banking services at reasonable costs. Tow ards this end,
The Deposit Insurance System in Malaysia
O ne of the significant m ilestones achieved during the year w as the successful establishm ent of the
M alaysia D eposit Insurance C orporation (M D IC ) in A ugust 2005. M alaysia now joins m ore than
95 countries that have explicit deposit insurance system s. The establishm ent of the M D IC further
strengthens the consum er protection fram ew ork in M alaysia and represents a m ajor step forw ard in the
ongoing developm ent of the M alaysian financial system through enhanced discipline and strengthened
risk m anagem ent practices of m em ber institutions, in line w ith the recom m endation outlined in the
Financial Sector M asterplan. The deposit insurance system has been carefully designed to m eet the needs
of M alaysians, and in particular, to provide equitable coverage for conventional and Islam ic deposits. A s an
im portant com ponent of the safety net, the deposit insurance system com plem ents the role and functions
of Bank N egara M alaysia in preserving overall financial stability.
Mandate
The M D IC is an independent statutory body established under the M alaysia D eposit Insurance C orporation
A ct 2005 (M D IA ) w ith m andates to:
(i) adm inister a deposit insurance system ;
(ii) provide insurance against the loss of part or all deposits of a m em ber institution;
(iii)provide incentives for sound risk m anagem ent in the financial system ; and
(iv)prom ote or contribute to the stability of the financial system .
In carrying out its m andates of (ii) and (iv), the M D IC is required to m inim ise cost to the financial system .
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The Banking System
Membership
M em bership in the deposit insurance system is com pulsory for com m ercial banks (including locally-
incorporated subsidiaries of foreign banks operating in M alaysia) licensed under the Banking and Financial
Institutions A ct (BA FIA ) 1989 and Islam ic banking institutions licensed under the Islam ic Banking A ct (IBA )
1983. Banking institutions that focus m ainly on w holesale deposits, nam ely m erchant banks, discount
houses and investm ent banks are autom atically excluded from m em bership. The branches of dom estic
banking institutions operating abroad and other deposit taking institutions nam ely, developm ent financial
institutions, provident and pension funds including the Em ployees Provident Fund and Lem baga U rusan
Tabung H aji (Pilgrim age Fund M anagem ent Board) and cooperative societies are also excluded from the
deposit insurance system .
Coverage
D eposits w hich enjoy deposit insurance coverage include savings, dem and, fixed, Islam ic deposits (general
investm ent and special investm ent deposits), bankers cheques, bank drafts and other paym ent instructions.
D eposits that are not payable in M alaysia, foreign currency deposits, negotiable instrum ents of deposit or other
bearer deposits, repurchase agreem ents and m oney m arket placem ents are not insured by the M D IC .
Eligible deposits are insured for up to RM 60,000, inclusive of principal and interest. This lim it is applied per
depositor per m em ber institution. Separate coverage is available for deposits that are held jointly or in
trust, and deposits of sole proprietorships, partnerships or professional practices.
Islam ic deposits are accorded a separate coverage lim it of RM 60,000, inclusive of principal and return on
deposit. This separate coverage lim it ensures equitable treatm ent and no com petitive distortion betw een
conventional and Islam ic deposits.
Reimbursement of depositors claims
W here a m em ber institution is unable to m eet its obligations to its depositors, the M D IC is required to
reim burse depositors up to the RM 60,000 insured lim it as soon as possible. Reim bursing depositors on a
tim ely basis is crucial to m aintain confidence in the financial system .
Funding
The deposit insurance system is funded by annual prem ium s assessed against m em ber institutions based
on total insured conventional or Islam ic deposits held as at 31 D ecem ber.
The M D IC m aintains and adm inisters tw o separate deposit insurance funds for conventional and Islam ic deposits.
Investm ents held in the Islam ic D eposit Insurance Fund are m ade in accordance w ith Shariah principles.
Governance structure
The M D IC is governed by a seven-m em ber Board of D irectors, com prising:
a C hairm an;
G overnor of Bank N egara M alaysia;
Secretary G eneral of Treasury;
a representative from the public sector; and
not m ore than three representatives w ith relevant private sector experience and at least one w ith
relevant banking and financial sector experience.
M em bers of the Board are appointed by the M inister of Finance, w ith the exception of the G overnor and
Secretary G eneral. D irectors, officers and em ployees of banking institutions w hich are m em bers of the deposit
insurance system and their related parties are not allow ed to be represented on the Board to avoid conflict of
interest and unfair access to confidential inform ation. The Board of D irectors is responsible for the conduct of
the business and affairs of the M D IC and has a statutory duty to act in the best interests of the deposit insurer
in accordance w ith its m andate.
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the Bank had in 2004, introduced the basic banking services
fram ew ork w hich required the offering of a basic savings
account and a basic current account to all M alaysians
including perm anent residents. Further to this, banking
institutions w ere directed to autom atically convert previously
designated plain vanilla savings account into basic savings
accounts (BSA) in August 2005. The m andatory conversion
w ould facilitate greater banking inclusion of all segm ents of
the com m unity. Concurrent w ith efforts to ensure financial
access w as the em phasis on ensuring fair and equitable
banking fees and charges. In recent years, in tandem w ith
increasing technological innovation and consum er dem and
for m ore innovative products, banking institutions have
m ade substantial investm ents on hardw are and softw are
infrastructure as w ell as product developm ent to m ake
available financial products and services that are aligned to
consum er dem ands and w hich are m ore efficient, reliable
and secure. To defray part of the costs of such investm ents,
fees w ere levied on products and services provided. To
ensure that the cost im posed is fair and equitable to both
consum ers and banking institutions, guidelines outlining the
guiding principles for the im position of fees and charges on
banking products and services for individuals and, sm all- and
m edium -sized enterprises (SM Es) w ere issued in m id-2005.
Banking institutions w ere required to ensure that their
existing fees and charges fram ew ork com plies w ith these
guiding principles and prior approval of the Bank w as
required for new fees or charges to be im posed on
custom ers.
Another im portant com ponent of the consum er protection
fram ew ork is to put in place the appropriate institutional
arrangem ents to ensure that consum ers have sufficient
avenues to seek assistance and redress w hen they face
problem s w ith their financial institutions. In this regard, the
Bank is establishing a Credit Counselling and Debt
M anagem ent Agency (CCDM A) that w ill provide an
avenue for individual borrow ers and potential borrow ers to
seek advice on m anaging their credit and to equip them
w ith the necessary skills to m anage their finances. In
addition, the CCDM A w ill also assist consum ers to pro-
actively m anage their debts via custom ised debt repaym ent
plans. This service is available for all debts relating to
housing loan, personal loan, credit card, charge card and
hire purchase that have been obtained by individuals from
financial institutions regulated by the Bank.
Collaboration and coordination
Bank N egara M alaysia is the prim ary supervisory and regulatory authority responsible for m aintaining overall
stability of the M alaysian banking system w hile the M D IC adm inisters the deposit insurance system in a m anner
that contributes tow ards prom oting public confidence in the financial system .
A s part of its supervisory functions, Bank N egara M alaysia perform s exam inations on the health of financial
institutions and provides the M D IC w ith reports on their findings. A s such the M D IC relies extensively on the
inform ation provided by the Bank for assessing its risks. In addition, Bank N egara M alaysia m ay advise the
M D IC that a financial institution is no longer viable. U pon such advice, the M D IC is required to find a least-cost
resolution to deal w ith the troubled m em ber institution. This m ay involve a w ide range of intervention actions,
including assum ption of control, applying for the appointm ent of a receiver or presenting a petition for the
w inding-up of that m em ber institution. This pow er, how ever, is only triggered w hen the Bank m akes such a
determ ination.
A s a result, close collaboration and coordination betw een Bank N egara M alaysia and the M D IC is crucial to
ensure the effectiveness and efficiency of both organisations in m eeting their m andates. The im portance of
such a relationship dictates that a strategic alliance agreem ent be executed betw een the tw o organisations to
clearly set out how they w ill collaborate and coordinate their activities in fulfilling their respective roles and
responsibilities, w ith the objective of m itigating unproductive overlap and duplication of efforts. Such an
agreem ent w ill also provide a platform for Bank N egara M alaysia and the M D IC to engage in active and
continuous consultations to achieve optim al outcom es.
Conclusion
The establishm ent of the M alaysian deposit insurance system strengthens the consum er protection fram ew ork
in M alaysia. G reat care w as taken in its design to com plem ent the role and function of Bank N egara M alaysia
as the prim ary regulator and supervisor in prom oting the safety and soundness of the financial system for the
benefit of all M alaysians.
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The Banking System
The Credit Counselling and
Debt Management Agency
(CCDMA) enhances the
avenues for consumers to seek
redress and assistance in
managing their finances.
Efforts to im prove consum er literacy levels continued
to be directed at addressing the issue of asym m etry of
inform ation through the publication and dissem ination
of inform ation on retail banking products and services
via the consum er education program m e, BankingInfo.
This program is currently in its fourth year of
operation. D uring the year, tw o new booklets, Current
Account and Investing Your Money w ere published.
These publications aim at providing basic inform ation
Establishment of the Credit Counselling and Debt Management Agency
A n im portant part of the strategies im plem ented in the Financial Sector M asterplan has been the
developm ent of the consum er protection fram ew ork and the enabling infrastructure to protect consum ers'
interests w hile at the sam e tim e enhancing consum ersfinancial capability to participate effectively in the
financial system . The agenda covers a w ide spectrum of initiatives involving infrastructure and institutional
developm ent and includes financial education, advisory services, distress m anagem ent, rehabilitation and
putting in place avenues for redress.
In this respect, Bank N egara M alaysia has already put in place a num ber of institutional arrangem ents to
ensure that consum ers have sufficient avenues to seek assistance and redress w hen they encounter
difficulties in their interface w ith financial institutions. These avenues include dedicated com plaint units
at banking institutions and an independent dispute resolution m echanism at the Financial M ediation
Bureau. In addition, Bank N egara M alaysia Lam an Inform asi, N asihat dan Khidm at has been established
to act as a centralised point of contact to facilitate a rapid and effective response for m em bers of the
public in m atters related to the financial sector. These institutional arrangem ents w ill be com plem ented
w ith the establishm ent of a C redit C ounselling and D ebt M anagem ent A gency (C C D M A ) w hich w ill
provide individuals w ith m oney m anagem ent and credit counselling as w ell as debt m anagem ent
services. Scheduled to be operational in A pril 2006, this institutional arrangem ent aim s not only at
providing advisory services but also assisting individuals w ho are encountering difficulties in m eeting
their financial com m itm ents.
Private consum ption in the M alaysian econom y has strengthened over the years, supported by positive
consum er sentim ents and increased access to banksfinancing, notably in the area of consum er loans.
This trend has been accom panied by an increase in the level of household indebtedness. For a num ber of
consum ption-driven econom ies, household debts have exceeded prudent levels in the range of 80-100%
of G D P. H ousehold indebtedness of the banking sector in M alaysia has, how ever, rem ained w ithin
prudent levels at 61.5% of G D P. Strong debt servicing capacity is also reflected in the levels of non-
perform ing loans of the household sector w hich rem ained stable at below 8% of total outstanding
household loans as at end-2005, m uch low er than the peak of 12.2% as at end-1998. This trend is
expected to be sustained w ith household lending continuing to record robust grow th. W hile prudent
lending and borrow ing practices w ill continue to be prom oted w ith concerted efforts at educating
consum ers on w ise financial m anagem ent, there w ill be cases w here consum ers are affected by
unexpected developm ents or cases in w hich they have overstretched them selves financially and are unable
to m eet their obligations.
The establishm ent of C C D M A is part of the m any efforts by Bank N egara M alaysia to proactively ensure
that the household sector continue to be resilient by providing an avenue for existing and potential
individual borrow ers to seek advice and assistance on m anaging their credit w hile at the sam e tim e
prom oting a sound and robust banking system by facilitating debt repaym ent efforts and m inim ising
incidence of non-paym ent arising from poor debt m anagem ent.
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and tips on current account and investm ent for
individuals. In addition, tw o inform ation guides,
Looking for Housing Loan and Basic Banking Services
w ere also published during the year to provide quick
and easy reference guides for consum ers. Sim ple
checklists to enable consum ers to do com parison
shopping for retail banking products or services are
also provided.
Type of Service Description
Counselling and Advice on O ne-to-one counselling and advice that cover financial budget, m oney
Financial Management m anagem ent and credit issues. A ssistance w ill be provided to consum ers in
analysing their financial situation and identifying all options available to
help them to get back on track.
Debt Management A personalised debt repaym ent program m e designed to provide eligible
Programme borrow ers w ith solutions for their financial situation. The program m e w ill
include review of current financial condition, developm ent of tailored
financial solutions in collaboration w ith borrow ers and banking institutions.
The program m e also provides ongoing counselling and education to
consum ers throughout the life of the program m e and serves as an
alternative m eans of debt settlem ent through out-of-court procedures
based on the agreed repaym ent plans betw een banking institutions and
the borrow ers.
Financial Education Education program m es for consum ers, in particular, on the proper use of
consum er credit and basic m oney m anagem ent skills such as savings and
budgeting as w ell as tips on how to use credit responsibly and debt
m anagem ent.
Details of Services Offered by CCDMA
The C C D M A w ill provide free credit counselling, education and debt settlem ent services to consum ers. C redit
counselling and education is im portant as individuals have to be equipped w ith the necessary skills and tools to
m anage their finances for long-term financial sustainability and to prevent a recurrence of such a situation. The
C C D M A w ill also assist consum ers to proactively m anage their debt via out-of-court procedures based on
agreed repaym ent plans betw een the creditors and the debtors. Eligible individual borrow ers w ill have access to
assistance in restructuring debts relating to housing loans, hire purchase, credit card, charge card and personal
loans that have been obtained from financial institutions regulated by Bank N egara M alaysia
1
. C ases involving
m ultiple creditors m ay be referred directly to C C D M A w hile borrow ers w ith single creditor should refer their
cases to C C D M A w hen they have failed to reach an am icable w ork-out plan w ith their creditors. A m ongst the
services offered by the C C D M A are:
The C C D M A w ill be governed by a Board of D irectors of w hom the m ajority are independent directors. The
A gency w ill be staffed by independent and experienced counselors w ho are experienced in credit counselling
and debt restructuring. The C C D M A is located at Level 8, M aju Junction M all, Kuala Lum pur.
The establishm ent of CCDM A m arks another m ilestone in the developm ent of a com prehensive consum er
protection infrastructure and w ill contribute positively tow ards sustainable developm ent of the consum er sector.
M uch progress has been achieved in developing and strengthening the consum er protection and education
fram ew ork that aim s at prom oting a fair, equitable and transparent financial m arket as w ell as active consum erism .
To further prom ote greater access to tim ely, reliable
and accurate inform ation as w ell as to m inim ise the
cost of inform ation search, com parative inform ation on
credit cards and hire purchase products w ere published
in the com parative tables in the BankingInfo w ebsite.
These tables contain up-to-date and pertinent
inform ation and provide a convenient point of
reference for consum ers. The tables also serve to
1
The institutions are com m ercial banks, m erchant banks, Islam ic banks, selected developm ent financial institutions, insurance com panies, takaful operators and
credit and charge card issuers.
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The Banking System
prom ote transparency and drive greater com petition
am ongst financial services providers. W ith the
publication of these tables, the total num ber of tables
published thus far stands at five. C urrently, efforts are
being undertaken to dissem inate such tables in hard
copy form at to enable consum ers w ithout internet
access to have access to such inform ation.
The publication of consum er education m aterials w as
com plem ented by dedicated outreach program m es
targeting groups such as w om en, college and university
students as w ell as retirees. The outreach program m es
seek to educate consum ers on financial m atters such as
banking products and services, budgeting and m oney
m anagem ent. W om en, particularly housew ives, have
been identified as one of the priority target audience
under the program m e in view of the im portant role they
play in m anaging the finances of the household and
their relative lim ited sophistication on financial m atters.
The outreach program m es targeted at college and
varsity students w ere geared tow ards proactively
equipping them w ith the requisite know ledge and skills
to m anage their finances prior to their entry into the
w ork force w hile outreach program m es for retirees w ere
targeted tow ards em pow ering them to take greater
responsibility and control for their post retirem ent
financial needs. In 2005, a total of 25 outreach
program m es w ere conducted reaching a total of m ore
than 4,000 participants in these three categories.
To further enhance interface w ith the public and as part
of its corporate social responsibility, Bank N egara
M alaysia had established the Lam an Inform asi N asihat
Khidm at (Bank N egara M alaysia LIN K) in February 2005.
The Bank N egara M alaysia LIN K acts a one-stop
reference point for the public to seek inform ation and
clarification on issues relating to policies and operations
of the Bank and the financial sector as w ell as acts as
one of the platform s for consum er education. It
provides face to face interaction to w alk-in visitors,
including individuals and SM Es, on general enquiries
and public com plaints, hence enhancing the
effectiveness and efficiency of inform ation search. The
Bank N egara M alaysia LIN K also offers support to the
Banks SM E U nit in various m atters associated w ith
access to financing by SM Es such as loan applications
and restructurings as w ell as inform ation on various
special funds provided by the Bank and other
governm ent m inistries or agencies. This w ill greatly
increase the outreach capabilities of the Bank in its
efforts to prom ote the developm ent of the SM E sector.
Further to this, the Bank N egara M alaysia LIN K provides
another platform for the Bank to educate m em bers of
the public on their roles and responsibilities as consum ers
of financial products and services, w ith the aim of
enhancing the level of financial literacy am ong the
banking public. Inform ation to the public and SM Es is
m ade available via various channels, including exhibitions,
interactive inform ation kiosks and booklets. Since its
inception, the response has been encouraging, w ith m ore
than 36,000 visitors received up to end-February 2006.
The bulk of the queries relate to banking and insurance,
SM E financing, credit inform ation, on-line applications for
exchange control approvals, returned and dishonoured
cheques, and currency.
Bank N egara M alaysia participated in a num ber of
exhibitions and sem inars throughout 2005. These
participations serve as an im portant m eans for
understanding and addressing public concerns on
financial m atters, as w ell as dissem inating the
inform ation published thus far. Publicity cam paigns via
advertisem ents in m ajor new spapers and radio stations
w ere also undertaken to prom ote greater consum er
aw areness of the consum er education program m e. In
2005, a total of 1.2 m illion booklets w ere taken up by
the public w hile the BankingInfo w ebsite recorded
14 m illion hits, bringing the total num ber of hits since
its launch in 2003 to 31 m illion (2004: 1.2 m illion
booklets and 17 m illion hits).
Bank N egara M alaysia also played host to the Third
International Forum on Financial C onsum er Protection
and Education during the year, w hich w as attended by
42 participants from 34 organisations w orldw ide. The
forum , them ed Fostering Greater Consumer Education
and Protection, w as aim ed to provide a platform for
regulators w orldw ide to share inform ation and insights,
discuss challenges and issues as w ell as w ork together
tow ards developing best practice standards on
consum er protection and education issues.
To com plem ent the policy m ove tow ards enhancing
consum er protection and in line w ith rising consum er
expectations, the scope of supervisory activities in
2005 w as also extended to include assessm ent of the
banking institutionscode of conduct in prom oting
fair m arket practices, disclosure standards as w ell as
effective dispute resolution m echanism s to ensure
that consum ers are treated equitably and have access
to adequate and tim ely inform ation to facilitate
effective decision m aking.
Ensuring Continued Access to Financing
A s a prim ary m obiliser of financial resources that are
channelled from savers to the various segm ents of the
econom y, the banking sector continues to play an
im portant interm ediation role in ensuring continued
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132
access to financing for all segm ents of the econom y.
The banking system rem ained the largest provider of
funds in the econom y, w ith an increase in loans
outstanding of 8.6% to RM 558.1 billion in 2005.
W ith the continued grow th in consum er spending,
the bulk of this increase w ere channelled to the
households and SM Es, w hich recorded an expansion
of 15.1% and 8.7% respectively in 2005. Lending
activities throughout the year thus w ere supportive in
m eeting the requirem ents of the various sectors of
the econom y, w ith m ost sectors recording sustained
grow th in loan approvals.
W ith the introduction of the new interest rate
fram ew ork in A pril 2004, banking institutions have
been better able to price interest-based products
efficiently, based on their respective cost of funding
and business strategy. Since the introduction of the
new fram ew ork, BLRs quoted by alm ost all banking
institutions in 2005, have been m aintained at the sam e
level (prior to the revision of the O vernight Policy Rate).
This reinforces the notion that banking institutions are
offering com petitive rates even before the introduction
of the new fram ew ork. A dditionally, the rem oval of the
m axim um lending spread of 2.5 percentage points
above BLR facilitated the continued innovation by
banking institutions to m eet the increasingly com plex
and sophisticated dem ands of custom ers. Indeed, som e
banking institutions have introduced new innovative
interest-based products, w hich include unsecured
personal loans to individuals and SM Es.
Ensuring continued access to financing for priority sectors
rem ains an im portant priority of the Bank. In line w ith the
objective of providing financing to the priority sectors in
the m ost efficient m anner, banking institutions also have
an im portant role to play. Recognising this and the need
to balance social responsibility w ith operational efficiency,
banking institutions w ere given the flexibility to set their
ow n targets for lending to SM Es and low er incom e group
for the purchase of residential properties, based on their
respective capacity and business strategy. In 2005, the
definitions used for various priority sectors w ere further
refined. The threshold for the purchase of low -cost
houses w as low ered from RM 180,000 to RM 60,000,
w hilst the definition of SM Es w as aligned w ith that of the
N ational SM E D evelopm ent C ouncil. To further prom ote
Bum iputera entrepreneurship, at least 50% of the target
set by banking institutions for SM E lending m ust be
channelled to Bum iputera SM Es.
Recognising the increasingly significant role of SM Es in the
econom y, various efforts are underw ay to enhance the
contribution of SM Es to the grow th of the econom y. In
addition to the realignm ent of functions and institutional
structure of DFIs, banking institutions have launched tw o
new trade finance products, nam ely, M ulti Currency Trade
Finance (M CTF) and Indirect Exporter Financing Schem e
(IEFS), to the SM Es w ith the aim of encouraging greater
SM E participation in the export m arket by low ering the
financing cost and rem oving the requirem ent for collateral.
The credit risk associated w ith this type of financing w ill be
shared betw een the participating banking institutions and
the EXIM Bank. Further to this, the Bank w ill be
establishing tw o venture capital funds of RM 150 m illion
each to prom ote the agriculture sector, particularly in the
areas of integrated farm ing and fisheries, as w ell as
biotechnology-related industries.
Completion of Financial Sector Restructuring
Exercise
The year 2005 w itnessed the conclusion of the
institutional arrangem ents w hich w ere established to
strengthen the resilience of the banking sector during
the A sian financial crisis. The last of the three specialised
institutions, Pengurusan D anaharta N asional Berhad
(D anaharta) w ound up its operations on 31 D ecem ber
2005, having successfully fulfilled its m andate of
addressing the N PL problem s faced by the banking
sector in the afterm ath of the crisis. O ver its lifespan,
D anaharta had effectively resolved all of the N PLs
acquired and recovered a total of RM 30.4 billion, w hich
represent a final lifetim e recovery rate of 58% . O f the
total am ount recovered, RM 26.7 billion have been
realised in cash w hilst the rem aining RM 3.7 billion are in
the form of residual recovery assets w hich include
restructured loans, securities, properties and other non-
cash assets. D anaharta has also successfully redeem ed
all of its zero-coupon bonds w hich carried a total face
value of RM 11.1 billion.
The lifetim e cost of operating D anaharta is estim ated to
be RM 1 billion. A s such, out of the initial seed capital of
RM 3 billion allocated for the establishm ent of
D anaharta, RM 2 billion w orth of assets, com prising
RM 1.5 billion w orth of residual recovery assets and
RM 0.5 billion in cash, w ere returned to its shareholder,
M inister of Finance Incorporated. W ith the closure of
D anahartas operations and transfer of the control of
assets to the M inister of Finance Incorporated, the latter
had established a w holly-ow ned subsidiary, Prokhas
Sdn. Bhd., on 1 January 2006 to act as the collection
agent for the residual recovery assets and to convert
these assets into cash at the best possible value.
A ll in all, the cost incurred by the G overnm ent for the
financial sector restructuring efforts through D anaharta
and D anam odal N asional Berhad (recapitalisation
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133
The Banking System
agency) am ounted to RM 12.6 billion or 2.5% of the
nations gross dom estic product. This is expected to
decline further as a result of prospective returns from
the rem aining investm ents. The successful com pletion
of the financial sector restructuring exercise has
m oulded a strong foundation for future developm ent
efforts to ensure that the banking sector rem ains
effective and capable of m eeting the changing
dem ands of an evolving econom y.
Moving Forward
In responding to the continuously evolving financial
landscape as w ell as changing custom er requirem ents
and sophistication, significant efforts w ill continue to
be directed tow ards the ongoing dynam ic
transform ation of the dom estic banking system into
one that has the capacity and agility to w ithstand
shocks and survive the increased financial m arket
volatilities. W ith the second phase of the FSM P w ell
underw ay, banking institutions w ill progressively face
greater com petition, both from w ithin the banking
sector and from non-bank financial institutions as w ell
as the capital m arkets. The challenges of a m ore
liberalised and deregulated environm ent necessitates
the form ulation and execution of coherent enterprise-
w ide strategies by banking institutions, coupled w ith
intensifying efforts to enhance efficiency, productivity
and innovation to ensure sustainable perform ance. In
this regard, policy initiatives w ill continue to be centred
on enhancing the dynam ism and resilience of the
banking system w hilst ensuring the preservation of
financial stability and protection of consum ers, w hile at
the sam e tim e ensuring the continued effective
interm ediation by the financial sector.
Banking Measures Introduced in 2005
In 2005, several initiatives w ere undertaken to strengthen the resilience of the financial system and to prom ote
efficiency and com petitiveness of the banking industry. In addition, m easures w ere also undertaken to enhance
consum er protection and public confidence in the banking sector.
Enhancing Safety and Soundness of the Banking System
Risk-Weighted Capital Ratio Framework Amendment to Risk Weight for Housing Loans Secured
by First Charge
To enhance the risk sensitivity of the existing capital adequacy fram ew ork, Bank N egara M alaysia revised
the risk w eight for non-perform ing housing loans secured by first charge from 50% to 100% in M arch
2005. The revision w ould ensure that banking institutions continue to m aintain sufficient capital to support
the expansion of financing for the purchase of residential properties.
Guidelines on Electronic Broking System by Licensed Money Brokers
The G uidelines w ere issued in A ugust 2005 to ensure that the electronic broking system offered by m oney
brokers operate in a m anner that prom otes the overall integrity and stability of the financial m arket. It also
sets out regulatory processes, procedures, conditions, operational as w ell as regulatory requirem ents for
operating an electronic broking system .
Guidelines on Corporate Governance for Licensed Institutions (Revised BNM/GP1)
A s part of the ongoing efforts to enhance corporate governance am ong licensed institutions, the
Guidelines on Corporate Governance for Licensed Institutions w ere issued in Septem ber 2005 to replace the
Guidelines on Directorships in the Banking Institutions. The G uidelines prescribe broad principles and
m inim um standards as w ell as specific requirem ents for sound corporate governance, w hich licensed
institutions and bank/financial holding com panies are expected to adopt. The revised G uidelines are based
on the fundam ental concepts of responsibility, accountability and transparency, w ith greater em phasis on
the role of the board and m anagem ent. A m ongst the key changes of the revised G uidelines are:
Separation of the roles of C hairm an and C EO ;
Separation betw een shareholders and m anagem ent;
Enhanced role and com position of independent directors. A t least one-third of the board m em bers m ust
be independent directors and they are expected to display strong elem ents of independence on the
board both in thought and actions;
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134
Establishm ent of three new board com m ittees, nam ely the N om inating C om m ittee, Rem uneration
C om m ittee and Risk M anagem ent C om m ittee; and
Lim itation on the num ber of Executive D irector to not m ore than one.
Guidelines on Regulatory Treatment for Credit Derivatives Transactions
The Guidelines on Regulatory Treatment for Credit Derivatives Transactions w ere issued in O ctober 2005, to
specify the capital adequacy treatm ent for credit derivatives transacted by banking institutions licensed
under the Banking and Financial Institutions A ct 1989 (BA FIA ). The G uidelines specify regulatory capital
treatm ent for the four m ost com m on types of credit derivatives products, nam ely, the credit default sw ap,
first-to-default basket, total rate of return sw ap and credit linked notes that are recorded in either the
banking book or the trading book. Banking institutions that engage in credit derivatives transactions are
required to obtain specific approval from Bank N egara M alaysia under the product approval process as set
out under the Guidelines on New Product Approval Requirements, w ith the exception of products that are
transacted based on com m on tem plates already approved by the Bank.
Promoting Competition and Efficiency within the Banking Sector
Guidelines on Base Lending Rate, Lending Rates and Deposit Rates of Banking Institutions
Effective M arch 2005, fixed deposits placed by corporations or large business enterprises and non-residents are
on a negotiated basis regardless of the am ount placed, hence contributing tow ards a m ore m arket oriented
pricing environm ent for depositors. O ther categories of depositors including individuals and sm all m edium
enterprises (SM Es) how ever w ill continue to be eligible for the Board rates for deposits up to RM 1 m illion.
Guidelines on Offering of Investments Linked to Derivative (ILD) Products
In line w ith the effort to increase choices of ILD products for eligible investors, Bank N egara M alaysia added
to its list, yield-enhancing investm ent products linked to foreign currency, com m odities, equity and fixed
incom e derivatives in A pril 2005. A s the list of products expanded, Guidelines on Offering of Investments
Linked to Derivative Products w ere issued to replace Investments Linked to Derivatives Guidelines issued on
12 M ay 2003. The G uidelines w ere further enhanced in February 2006 to incorporate the follow ing
changes:
The cap on aggregate outstanding notional am ount of ILD products offered to investors w as rem oved;
and
File and U seapproach adopted for subm ission of applications pertaining to ILD products w hereby ILD
products are deem ed approved upon subm ission to Bank N egara M alaysia subject to com pliance w ith
specified conditions in respect of risk m anagem ent, disclosure, m arketing and type of products offered.
Investment in Units of Property Trust Funds and Unit Trust Funds
Effective 20 M ay 2005, licensed banking institutions are allow ed to invest in both property trust funds and
unit trust funds, provided that:
The investm ent shall not exceed 5% of the issue size of the fund or 5% of the licensed banking
institutions capital funds, w hichever is low er;
The aggregate value of all such investm ents shall not exceed 10% of the licensed banking institutions
capital funds; and
The aggregate value of the investm ent in shares and interest-in-shares, unit trust funds, property trust
funds and im m ovable properties does not exceed 50% of the licensed banking institutions capital base.
Guidelines on Investment Banks
Pursuant to Section 126 of BA FIA 1989 and Section 158 of the Securities C om m ission A ct 1993, Bank
N egara M alaysia and the Securities C om m ission (SC ) jointly issued the G uidelines on Investm ent Banks on
1 July 2005 that specify the requirem ents, processes and regulatory fram ew ork for investm ent banks.
A ll financial groups involved w ere given a one-year period, com m encing 1 July 2005 to be transform ed into
investm ent banks. In facilitating this process, the G overnm ent agreed to grant stam p duty and real property
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The Banking System
gains tax exem ptions and tax credits for the accum ulated losses of the acquiree financial institutions involved
in the rationalisation. Foreign equity participation for investm ent banks w as also increased to 49% to
facilitate greater transfer of skills, expertise and technological know -how to the investm ent banks.
Guidelines on Access to Interbank Market by Universal Brokers
A s part of the m easures to strengthen the capacity and com petitiveness of universal brokers, universal
brokers that m eet the follow ing eligibility criteria w ere allow ed to access the interbank m arket to undertake
borrow ing or lending of RM funds:
M inim um shareholdersfunds unim paired by losses of RM 100 m illion;
Strong capital position as m easured by capital adequacy ratio (C A R) im posed by Bursa M alaysia (Bursa);
Satisfactory conduct of current credit facilities obtained from banking institutions; and
C om pliance w ith prudential and financial regulations im posed by SC and Bursa.
The G uidelines also stipulate the prudential requirem ents for universal brokers w ho w ish to participate in
the interbank m arket. The m ain requirem ents are as follow s:
Lim it on aggregate interbank borrow ings not exceeding tw o tim es its shareholdersfunds, unim paired
by losses;
A robust and effective risk m anagem ent fram ew ork to identify, m easure, m onitor and m anage risks;
and
A sound liquidity m anagem ent fram ew ork that encom passes strategies to m anage funds, ability to
m atch near and short-term liquidity requirem ents and m aintenance of sufficient credit lines, liquefiable
assets in m anaging potential shortfall in liquidity.
These universal brokers are also allow ed to borrow securities from the Bank via the repo arrangem ent to
enhance their securities broking activity and w ill be subject to exam ination by the Bank and SC , w here
appropriate.
Provision of Factoring Services by Commercial Banks
W ith effect from 10 A ugust 2005, all com m ercial banks are allow ed to provide factoring services either as
part of their com m ercial banking business or through a separate legal entity. The separate legal entity can
be in the form of a fully or partially ow ned subsidiary or a joint venture w ith any other parties, including
foreign parties. This is to encourage com petition and participation of banking institutions in areas currently
served by fringe institutions.
Guidelines on the Disposal/Purchase of Non-Performing Loans (NPLs) by Banking Institutions
To allow banking institutions greater flexibility in m anaging their balance sheets and in reallocating
resources to strengthen their business potential and com petitiveness, Guidelines on the Disposal/Purchase
of Non-Performing Loans (NPLs) by Banking Institutions w ere issued in D ecem ber 2005. The G uidelines
allow banking institutions to undertake outright sale of their N PLs to eligible third parties, as w ell as to
purchase N PLs from other banking institutions. It also specifies general conditions, requirem ents and
processes as w ell as roles and responsibilities of the Board of D irectors and senior m anagem ent of banking
institutions that w ish to undertake such sale or purchase. The G uidelines prescribe that N PLs can only be
sold to dom estic banking institutions or locally incorporated foreign banking institutions in M alaysia,
dom estic investors or foreign investors through Special Purpose Vehicles (SPVs) w ith foreign equity
participation capped at 49% . A ll N PLs sold to eligible third parties m ust be on a non-recourse basis.
Establishment of New Branches by Locally-Incorporated Foreign Banks
In line w ith the broad strategies outlined in the Financial Sector M asterplan, locally-incorporated foreign
banks (LIFBs) are allow ed to establish up to four additional branches w ithin a period of one year w ith effect
from 1 January 2006 subject to specified conditions. This operational flexibility represents the first of a
phased approach of branch liberalisation. LIFBs are how ever, required to seek Bank N egara M alaysias prior
approval for the establishm ent of the new branches.
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136
PERFORMANCE OF THE BANKING SYSTEM
Overview
Resilience of the banking system strengthened further in
2005 am idst favourable m acroeconom ic conditions w ith
the key financial soundness indicators exhibiting
encouraging trends. The banking system s exposure to
the household sector rem ained w ithin prudent levels
and does not represent a threat to the overall system ic
stability of the system . Key developm ents in the
financial perform ance of the banking system are
sum m arised as follow s:
The level of capitalisation rem ained above 13%
am idst strong expansion in asset base and
continued strong profit perform ance;
The quality of the loan portfolio continued to
im prove, underpinned by low er incidence of new
NPLs, higher reclassification of NPLs to perform ing
status and recoveries. Specifically, the NPL ratio of the
business sector declined further w hilst the NPL ratio
of the household sector rem ained relatively stable;
Lending activities rem ained robust, driven
prim arily by lending to the retail sector in an
environm ent of greater com petition; and
Exposure to m arket risks rem ained m anageable.
Profitability
The banking system continued to record a strong
profit perform ance in 2005 underpinned by
favourable m acroeconom ic conditions and financial
m arkets. Prelim inary unaudited pre-tax profits for the
year am ounted to RM 12.4 billion, an increase of 7%
over the level achieved in the preceding year.
Reflecting the continued diversification in business
portfolio of banking institutions, grow th in profits
w as driven m ainly by higher revenue derived from
lending and financing activities, sale of w ealth
m anagem ent products, provision of rem ittance
services as w ell as trading and investm ent activities.
The higher profit w as achieved am idst continuing
efforts by banking institutions to further strengthen
their balance sheets. A s a result, return on average
equity im proved to 16.9% . M eanw hile, return on
Enhancing Consumer Protection
Imposition of Fees and Charges on Banking Products and Services
A s part of the m easures to ensure access to banking services and to ensure that fees and charges levied are
fair and equitable to both banking institutions and consum ers, guiding principles w ere issued relating to the
im position of fees and charges for banking products and services. Banking institutions are required to
ensure that their existing fees and charges com ply w ith these principles and prior approval from Bank
N egara M alaysia is required for any upw ard revision of existing fees and charges or for any introduction of
new fees and charges im posed on individuals and/or SM Es.
Access to Financing by Priority Sectors
A s in previous years, Bank N egara M alaysia continues to place em phasis on lending by banking institutions
to the priority sectors, nam ely SM Es, bum iputera SM Es and low cost houses costing RM 60,000
1
and below .
Targets on new loans approved w ere set for the com pliance period 1 January 2006 - 31 D ecem ber 2007
based on various factors taking into account the capacity of the respective institutions. In addition, the
interest rate charged by banking institutions for housing loans granted under the G uideline, nam ely low
cost houses costing RM 60,000
1
and below has also been capped at BLR + 1.75% .
Basic Banking Services
To ensure that all custom ers have access to banking services, under the Basic Banking Services (BBS)
fram ew ork, all banking institutions that did not offer autom atic conversion for previously designated plain
vanilla savings account into Basic Savings A ccounts w ere required to autom atically convert all such accounts
w ith effect from 1 Septem ber 2005.
Comparative Tables on BankingInfo
In D ecem ber 2005, Bank N egara M alaysia expanded the scope of com parative tables to cover banking retail
products on its consum er education w ebsite, BankingInfo. These tables allow consum ers to perform
com parative shopping and is part of the efforts to prom ote greater access to inform ation and to encourage
m ore inform ed decisions on m anaging their finances by consum ers.
1
For Sabah and Saraw ak, the purchase price of low cost houses are capped at not m ore than RM 72,000.
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137
The Banking System
Table 5.1
Banking System
1
: Income and Expenditure
For the calendar year
2004 2005p A nnual change
RM m illion %
Interest incom e
2
40,755 43,757 3,002 7.4
Less: Interest expense 20,591 22,057 1,466 7.1
N et interest incom e 20,164 21,701 1,536 7.6
A dd: Fee-based incom e 4,229 4,684 455 10.7
Less:Staff cost 5,662 6,309 647 11.4
O verheads 6,427 7,008 581 9.0
G ross operating profit 12,305 13,068 763 6.2
Less: Loan loss and
other provisions 4,587 5,476 889 19.4
G ross operating profit
after provisions 7,718 7,592 -125 -1.6
A dd: O ther incom e 3,852 4,788 936 24.3
Pre-tax profit 11,569 12,380 811 7.0
O f w hich:
C om m ercial banks
3
10,679 11,006 328 3.1
M erchant banks 814 1,340 526 64.6
Islam ic banks 76 34 -43 -56.1
Return on assets (% ) 1.4 1.4
Return on equity (% ) 16.3 16.9
C ost to incom e
4
(% ) 49.6 50.5
1
Includes Islam ic banks.
2
Effective January 2005, banking institutions no longer accrue interests on non-
perform ing loan accounts.
3
Includes finance com panies.
4
O nly taking into account staff cost, overheads, net interest incom e and
fee-based incom e.
p Prelim inary
N ote: Total m ay not add up due to rounding.
The lending rates for new loans to consum ers (excluding
credit cards) averaged at 4.09% per annum in D ecem ber
2005 (4.34% per annum in D ecem ber 2004). The
average lending rates on new passenger car loans
recorded the m ost apparent reduction, falling by
219 basis points from 6.53% per annum in D ecem ber
2004 to 4.34% per annum in D ecem ber 2005.
C onsequently, gross interest m argin of the banking
institutions (m easured as the difference betw een interest
incom e and interest expense, expressed as a percentage
of interest-related assets) rem ained alm ost unchanged at
2.65 percentage points. This w as partly due to the
higher base lending rate of banking institutions follow ing
the increase in the Bank N egara M alaysia O vernight
Policy Rate in N ovem ber 2005 w hich saw the 3-m onth
KLIBO R rates trending upw ards by 40 basis points to
3.20% per annum as at end-D ecem ber 2005.
Revenue generated from fee-based activities posted a
strong grow th of 10.7% during the year, as a result of
higher sales of w ealth m anagem ent products such as
unit trust and bancassurance, and an increase in
rem ittance services provided by banking institutions.
Sim ilarly, there w as higher fees received from trade-
related activities, such as guarantees and com m issions
from the issuance of bankers acceptances, follow ing the
grow th in lending. M eanw hile, the greater usage of
cards for purchases and other transactions has also
contributed to the higher fee incom e of banking
institutions. For the year as a w hole, fee-based incom e
for the com m ercial banks and finance com panies as a
group registered an increase of 11.1% to account for
17.3% of gross operating incom e.
Incom e derived by the m erchant banks from fee-based
activities, on the other hand, recorded a m arginal decline
of 0.4% to RM 0.3 billion. W hilst higher incom e w as
generated from the extension of loans and financing, this
w as partially offset by a m oderation in incom e from
corporate advisory services. H ow ever, fee-based
average assets rem ained unchanged at 1.4% ,
follow ing corresponding increase in total assets
during the year.
G ross operating profits for the year rose by 6.2% to
RM 13.1 billion on account of higher incom e from interest-
related and fee-based activities. Net interest incom e grew
7.6% driven largely by the grow th in interest incom e from
loan and financing activities (+RM 1.3 billion or 4% ) despite
com petitive lending conditions, coupled w ith higher net
incom e from interbank activities. The grow th w as, how ever,
m oderated by an increase in interest expense incurred
during the year on deposits (+RM 0.9 billion or 6.2% ) in
tandem w ith the higher am ount of custom er deposits
accepted. Consistent w ith the strong expansion in lending
activities, driven particularly by the retail segm ent, interest
incom e as a percentage of interest-related assets increased
by 11 basis points to 5.35 percentage points.
C om petition in the lending m arket, particularly in the
continuing buoyant retail segm ent, resulted in further
reduction in the average lending rates during the year.
Table 5.2
Weighted Average Lending Rates for New Loans
C om m ercial banks
A verage for D ecem ber (% per annum )
2004 2005
Business loans 5.64 5.70
of which: SMEs 6.20 6.36
H ousehold loans
1
4.34 4.09
of which:
Purchase of residential
properties 3.08 3.15
Purchase of passenger
cars 6.53 4.34
1
Excludes credit card.
C05 Banking System pg116-154 3/14/06, 9:14 PM 137
138
incom e rem ained as the m ajor contributor to operating
incom e of m erchant banks, accounting for 44.7% of
total incom e in 2005. W ith the creation of investm ent
banks, com petition in fee-based activities is expected
to intensify, thus adding further pressure on revenue
sustainability of the m erchant banks. M eanw hile,
revenue generated from trading and investm ent
activities recorded a m arked increase of 116.6% .
A lthough the banking system continued to incur
substantial am ounts in staff-related costs and
im provem ents in IT system s and business processes
during the year, the ratio of staff cost and overheads
to gross operating incom e rose m arginally to 50.5% .
Such expenditures w ere necessary to enhance
prospects for further business expansion and to retain
existing talents and attract new skills into the industry
given the grow ing m obility of labour. Investm ents in
the acquisition and developm ent of skills have been
m ade to enhance the productivity and profitability of
banking institutions. The banking institutions w ere
able to generate RM 2.10 in operating profits for every
ringgit spent on their personnel. M eanw hile, the
increase in overheads reflected the pursuit of
aggressive m arketing and sales strategies adopted by
several banking institutions. C ollectively, expenses
incurred on m arketing, adm inistration and other
general expenses accounted for 60.2% of total
overhead expenses com pared w ith 57.7% in 2004.
The encouraging business and operating environm ent
and im proving financial positions am idst favourable
econom ic outlook have provided the im petus for
banking institutions to continue to pursue balance
sheet strengthening strategy. D uring the year, the
banking sector set aside loan loss provisions totaling
RM 11.4 billion com prising specific provisions of
RM 9.7 billion (+9.8% ) and w rite-offs of RM 0.3 billion
(+216.4% ). Reflecting the higher provisioning am ount,
net interest m argin (difference betw een interest
incom e and interest expense m inus overheads and
provisions as a percentage of interest-related assets)
show ed a sm all decline of seven basis points to
0.37 percentage point in 2005. W ith this pro-active
m ove by banking institutions, and the resultant
strengthening of the balance sheets, the banking
sector is better positioned to continue supporting
econom ic developm ents and activities in the future.
Lending Activity
Lending activities of the banking system rem ained
strong in 2005, supported by sustained econom ic
grow th and the resilient financing dem and by both
businesses and households. Strengthened resilience
am idst favorable financial perform ance and im proved
asset quality had enabled the banking system to
continue to m eet the increased financing requirem ents
by both the business and household sectors, thus
contributing tow ards supporting the grow th in
business activity and private consum ption. M eanw hile,
the m arket lending rates rem ain com petitive w ith rates
on new loans by the com m ercial banks ranging
betw een 5.62% to 6.23% per annum and 6.23% to
7.39% per annum for finance com panies.
Their strengthened position has
enabled the banking sector to
continuously meet the
increased financing
requirements of the business
and household sectors, thus
contributing towards
supporting the growth in
business activity and private
consumption.
Table 5.3
Banking System
1
: Financing Activities
For the year
2004 2005
A nnual
grow th
(% )
RM billion
Loan approvals 173.6 193.4 11.4
Loan disbursem ents 488.2 529.3 8.4
Loan repaym ents 461.6 489.2 6.0
A s at end-
2004 2005
A nnual
grow th
(% )
RM billion
O utstanding loans 513.9 558.1 8.6
Total banking system financing
2
547.0 594.0 8.6
Total financing for the econom y
3
671.5 733.6 9.3
1
Includes Islam ic banks.
2
O utstanding banking system loans plus private debt securities held by the
banking system .
3
O utstanding banking system loans plus outstanding private debt securities.
The dem and for financing continued to register an upw ard
trend, w ith loan applications received by the banking
institutions increasing by 11.7% to RM 305.4 billion in
2005. New loan approvals rem ained relatively stable w ith
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139
The Banking System
new loans approved expanding by 11.4% to RM 193.4
billion to m ore than 3 m illion applications. O n average,
RM 16.1 billion new loans w ere approved m onthly in
2005 com pared w ith RM 14.5 billion recorded in the
preceding year. W ith continued expansion in private
sector activities, total disbursem ents rose by 8.4% to
RM 529.3 billion, m ainly attributable to the draw dow n
by the m anufacturing sector, w hich accounted for
24% (RM 127 billion) of total disbursem ents.
M eanw hile, undraw n loans increased by 7.9% to
RM 170.9 billion, m uch low er than the preceding years
increase of 16.7% , attributed m ainly to unutilised
credit card lines. A s disbursem ents surpassed
repaym ents, total outstanding loans rose strongly at an
annual rate of 8.6% to RM 558.1 billion as at end-
2005. Total holdings of private debt securities (PD S) by
banking institutions increased by 8.5% in 2005,
com pared w ith a decline of 3.1% in 2004. A s a result,
aggregate financing by the banking sector to support
econom ic activities increased by 8.6% .
Lending to households
O utstanding household loans expanded by 15.1% in 2005
to RM 304.4 billion, to account for 54.5% of outstanding
loan portfolio of the banking system . Stable labour m arket
conditions, increasing disposable incom e and attractive
financing options contributed tow ards stronger consum er
spending, hence stim ulating dem and for new financing as
reflected by an 18% increase in loan applications received
from individuals or 46.5% of total loan applications
received by the banking sector. Total loans approved grew
by 12% to RM 97.2 billion, or 50.3% of total loans
approved by the banking system during the year, w hilst
loan disbursem ents recorded a corresponding increase of
11.4% to RM 145.2 billion, or 27.4% of the total
disbursem ents in the banking system . Unutilised loans
w ithin this sector grew by 17.2% to RM 79.5 billion,
accounting for 46.5% of the total unutilised loans w ithin
the banking system . The increase in unutilised loans w as
m ainly due to a higher increase in unutilised credit card
lines, attributed to a larger num ber of credit cards issued
and higher approved lim its granted by the banking
institutions to cardholders.
[A detailed analysis of lending to households is provided
under sub-topic "Exposure to the Household Sector" in
this chapter.]
Lending to businesses
Lending to businesses rem ained resilient in 2005,
reflecting the stronger private sector investm ent and
business activities during the year. D em and for new
financing by businesses grew by a m ore m oderate rate
of 5.7% to RM 158.5 billion in 2005 (2004:20% ). The
slow er grow th in new business loans w as m ainly
attributable to a decline in loan applications from the
construction sector, as w ell as slow er increase in
applications from the m anufacturing sector and the
w holesale and retail trade, restaurants and hotels
sector. N otw ithstanding the m ore m oderate increase in
loan applications, grow th in new loan approvals w as
stable. Total loans approved increased by 9.8% to
RM 93.2 billion, accounting for 48.2% of total
approvals w ithin the banking system . Loan approvals
to businesses w ere broad-based w ith 50.2% or
RM 46.8 billion of new loans approved w ere channelled
to m anufacturing, w holesale and retail trade,
restaurants and hotels and construction sectors.
N otably, loan approvals to the agriculture sector
recorded a significant grow th of 80% to RM 5.2 billion.
D isbursem ents to the business sectors increased by
7.4% to RM 360.1 billion, accounting for 68% of total
loans disbursed by the banking system , of w hich 72.3%
or RM 260.2 billion w ere channelled to the
m anufacturing, w holesale and retail trade, restaurants
and hotels and finance, insurance and business services
sectors as the service and m anufacturing sectors
continue to benefit from strong consum er spending and
higher exports of m anufactured goods. A s
disbursem ents w ere relatively higher com pared w ith
repaym ents, total outstanding loans to the business
sector expanded by 2.9% to RM 225.6 billion as at end-
2005. M eanw hile, total unutilised loans increased
m arginally by 0.2% to RM 87.4 billion.
Lending to SMEs
The banking sector continued to support the financing
needs of the SM Es w ith lending to SM Es continuing to
drive grow th of loans to businesses. Total outstanding
loans to the SM Es expanded strongly by 8.7% to RM 96
billion as at end-2005 to account for 42.6% of loans to
businesses or 17.2% of total outstanding loans. Reflecting
the increasing financing needs of the SM Es, the banking
system received loan applications from m ore than 100,000
SM Es totaling RM 59.7 billion, a 10.3% increase from the
previous year. Advancem ent in credit analysis, assessm ent
tools and m ethodologies, enhanced access to current
custom er inform ation and the liberalisation in the pricing
fram ew ork facilitated the increased provision of financing
to the SM Es. During the year, RM 35.8 billion new loans
w ere approved to m ore than 85,000 SM Es, at lending
rates w hich averaged betw een 5.72% to 6.43% per
annum for the com m ercial banks. The approval rate w as
higher at 59.9% , w hilst rejections rem ained low ,
constituting 18.5% of the total applications received from
the SM Es. Loan disbursem ents w ere also higher. During
the year, RM 110.7 billion w ere disbursed to the SM Es, an
C05 Banking System pg116-154 4/14/06, 13:28 139
140
increase of 10.2% from the preceding year, constituting
30.7% of the total disbursem ents to the business sectors.
O n a sectoral basis, lending to SM Es w as generally
diversified w ith alm ost tw o-thirds being channelled to the
w holesale and retail trade, hotels and restaurants,
m anufacturing and construction sectors, reflective of the
business focus of the m ajority of the SM Es.
W ith capacity building initiatives for SM Es in the pipeline,
m easures to enhance access to financing such as the
establishm ent of the SM E Bank, securitisation of SM E
loans, the introduction of new trade financing products
for SM Es as w ell as the establishm ent of SM E Portal w ill
further im prove access to financing for SM Es. This w ould
encourage further lending by banking institutions to
SM Es. In addition, in response to strong dem and on SM E
special funds allocated by Bank N egara M alaysia, Fund
for Sm all and M edium Industries 2 and New Entrepreneurs
Fund 2 w ere further increased by RM 250 m illion and
RM 350 m illion respectively. O n aggregate, Bank N egara
M alaysia has allocated a total of RM 8.9 billion for the
special funds for SM Es. O f this, a total of RM 11.2 billion
has been approved as at end-2005.
Financing through the bond market
The bond m arket sustained its grow th m om entum in 2005.
A total of RM 35.7 billion of PDS w as issued, an increase of
27.1% com pared to 2004, m ainly by the utilities,
construction and finance, insurance, real estate and business
services sectors w hich accounted for 74.3% of total
issuance. As a result, outstanding PDS in the m arket rose by
11.4% to RM 175.6 billion as at end-2005. Total financing
channelled to the econom y, w hich included lending by the
banking institutions, expanded by 9.3% to RM 733.6 billion.
Asset Quality
A m idst sustained econom ic perform ance, the loan
quality of the banking system im proved further in 2005,
w ith non-perform ing loans (N PLs) declining to record
low levels since the A sian financial crisis. The
im provem ent in asset quality during the year w as
attributed m ainly to higher reclassification of N PLs to
perform ing status and w rite-offs.
The net N PLs of the banking system on the 3-m onth
classification basis declined by 14.6% to RM 31.3 billion
as at end-2005 (end-2004: RM 36.7 billion), w hilst net
NPLs based on the 6-m onth classification decreased to
RM 24.7 billion as at end-2005 (end-2004: RM 28.6 billion).
C onsequently, the net N PL ratio on the 3-m onth
classification im proved by 1.7 percentage points to 5.8%
(end-2004: 7.5% ). Based on the 6-m onth classification,
the net N PL ratio im proved by 1.2 percentage points to
4.6% (end-2004: 5.8% ). The loan loss coverage of the
banking system also strengthened w ith the declining N PL
level as w ell as the adoption of m ore prudent
provisioning policies by banking institutions. A s at end-
2005, the loan loss coverage ratio of the banking system
im proved to 59.2% on the 3-m onth basis and 65.4% on
the 6-m onth basis (end-2004: 54.9% and 60.1%
respectively). D uring the year, a few m ore banking
institutions adopted the 3-m onth classification policy.
C onsequently, banking institutions that control 95.6%
m arket share of total loans in the banking system have
adopted the 3-m onth classification policy.
During 2005, the decline in NPLs w as also due to the
higher rate of reclassification of NPLs to perform ing status
(+30.2% ), follow ing the overall im provem ent in the
0
1
2
3
4
5
6
7
8
9
10
J F M A M J J A S O N D J F M A M J J A S O N D
N et N PLs (6-m onths) N et N PLs (3-m onths)
N et N PL ratio (6-m onths) N et N PL ratio (3-m onths)
RM billion %
Graph 5.1
Banking System
1
: Net Non-performing Loans
1
Includes Islam ic banks.
0
5
10
15
20
25
30
35
40
45
2004 2005
0
20
40
60
80
100
120
J F M A M J J A S O N D J F M A M J J A S O N D
RM billion
9-<12 m onths 1-<3 m onths
3-<6 m onths 12 m onths and above
6-<9 m onths
Graph 5.2
Banking System
1
: Ageing Profile of Loans in Arrears
1
Includes Islam ic banks.
2004 2005
C05 Banking System pg116-154 3/14/06, 9:14 PM 140
141
The Banking System
Table 5.4
Banking System: Non-performing Loans and Loan Loss Provisions
A s at end-
2004 2005
C lassification
3-m onth 6-m onth 3-m onth 6-m onth
RM m illion
Banking system
N on-perform ing loans 60,379.8 50,711.5 53,558.4 45,196.1
Interest-in-suspense 8,469.4 8,105.6 7,332.6 7,108.8
Specific provisions 15,242.3 14,015.9 14,915.0 13,429.3
G eneral provisions 9,488.7 8,367.5 9,459.4 9,016.2
N et N PL ratio (% )
1
7.5 5.8 5.8 4.6
Total provisions/N PL (% ) 54.9 60.1 59.2 65.4
Commercial banks
2
N on-perform ing loans 55,730.3 46,774.8 48,818.4 41,140.5
Interest-in-suspense 7,880.2 7,537.2 6,696.8 6,488.8
Specific provisions 14,289.8 13,094.8 13,864.0 12,416.6
G eneral provisions 9,089.6 7,968.3 8,913.5 8,470.2
N et N PL ratio (% )
1
7.1 5.5 5.5 4.4
Total provisions/N PL (% ) 56.1 61.1 60.4 66.5
Merchant banks
N on-perform ing loans 2,496.8 2,268.0 1,782.8 1,735.1
Interest-in-suspense 373.8 364.4 356.2 355.6
Specific provisions 455.4 457.5 463.5 464.6
G eneral provisions 235.8 235.9 192.9 193.0
N et N PL ratio (% )
1
19.4 16.8 12.1 11.5
Total provisions/N PL (% ) 42.7 46.6 56.8 58.4
Islamic banks
N on-perform ing loans 2,152.7 1,668.7 2,957.1 2,320.5
Interest-in-suspense 215.3 204.1 279.6 264.4
Specific provisions 497.2 463.6 587.6 548.1
G eneral provisions 163.4 163.4 353.0 353.0
N et N PL ratio (% )
1
13.4 9.3 10.5 7.6
Total provisions/N PL (% ) 40.7 49.8 41.3 50.2
1
N et N PL ratio = (N PL less IIS less SP) / (G ross loans less IIS less SP) x 100% .
2
Includes finance com panies.
N ote: Total m ay not add up due to rounding.
repaym ent capacity of borrow ers, and w rite-offs of loans
(+3.1% ). New classification of loans as NPLs increased by
5.6% m ainly due to the tightening of the NPL classification
policy of a num ber of banking institutions, but the increase
w as m arginal vis--vis the im provem ent in the overall asset
quality of the banking system . Loans-in-arrears (net of
NPLs) of betw een one to three m onths have also declined
by 3.5% during the year, accounting for 6.5% of total
loans. Hence, risk arising from potential new NPLs in the
banking system rem ained m anageable.
The overall decline in N PLs of the banking system
prim arily reflected im provem ents in the loan quality of
the business sector. Supported by strong external
dem and and sustained expansion in dom estic dem and,
the repaym ent capacity of the business sector
im proved in 2005. N PLs for the business sector show ed
a m arked decline of 15.8% to RM 29.4 billion,
accounting for 11.2% of total business loans as at
end-2005 (end-2004: 13.7% ). This w as m ainly
attributed to declines in N PLs for the m anufacturing,
distributive (w holesale and retail trade and restaurants
and hotels) and the construction sectors. The N PLs for
the m anufacturing sector show ed the largest
im provem ent by recording a decline of 24.8% and
accounted for 10.8% of loans to the m anufacturing
sector as at end-2005 (end-2004: 13.8% ). The N PL
ratios for the distributive and construction sectors
im proved to 7.7% and 20.4% respectively (end-2004:
10% and 23.7% respectively).
In tandem w ith the im provem ent in N PLs for the business
sector, the N PLs of SM Es also declined by 3.8% during
the year. A s at end-2005, N PLs of SM Es declined to
C05 Banking System pg116-154 3/14/06, 9:14 PM 141
142
Table 5.5
Banking System
1
: Non-performing Loans by Sector
A s at end-
A s percentage of total
N PL by sector
C hange
loans to the sector
2004 2005 2004 2005
RM m illion %
Business enterprises 34,907.0 29,383.3 -15.8 13.7 11.2
of which SME loans 10,589.1 10,191.9 -3.8 12.0 10.6
Households 19,047.6 21,468.6 12.7 7.6 7.5
Others 1,110.0 1,347.1 21.4 11.0 12.8
Total 55,064.7 52,199.0 -5.2 10.7 9.4
A griculture, hunting, forestry and fishing 679.7 601.6 -11.5 6.2 5.5
M ining and quarrying 90.3 123.7 37.0 9.1 15.3
M anufacturing 8,705.4 6,550.1 -24.8 13.8 10.8
Electricity, gas and w ater supply 1,296.6 1,221.2 -5.8 25.0 26.4
W holesale and retail trade, restaurants and hotels 4,356.7 3,603.3 -17.3 10.0 7.7
Wholesale trade 1,635.8 1,420.0 -13.2 6.4 5.2
Retail trade 1,252.9 1,123.8 -10.3 9.6 7.6
Restaurants and hotels 1,468.0 1,059.6 -27.8 30.4 21.7
Broad property sector 26,726.6 26,885.6 0.6 12.8 11.7
Construction 7,286.2 6,126.4 -15.9 23.7 20.4
Purchase of residential property 11,852.7 14,006.8 18.2 8.9 9.4
Purchase of non-residential property 4,432.1 4,125.1 -6.9 14.2 11.7
Real estate 3,155.6 2,627.3 -16.7 23.0 17.9
Transport, storage and com m unication 778.0 639.6 -17.8 7.8 5.6
Finance, insurance and business services 1,882.9 1,778.3 -5.6 6.1 5.9
C onsum ption credit 2,579.4 2,698.1 4.6 8.1 7.3
Personal use 1,878.4 1,923.1 2.4 10.9 9.7
Credit cards 663.9 743.7 12.0 4.7 4.5
Purchase of consumer durable goods 37.0 31.2 -15.6 11.8 11.4
Purchase of securities 2,896.6 2,425.6 -16.3 14.9 11.6
Purchase of transport vehicles
2
3,167.3 3,550.9 12.1 4.3 4.0
C om m unity, social and personal services 795.3 773.8 -2.7 15.6 13.5
1
Includes Islam ic banks.
2
Includes purchase of passenger cars.
N ote: Total m ay not add up due to rounding.
RM 10.2 billion to account for 10.6% of SM E loans (end-
2004: 12% ). Im provem ents in the asset quality of SM E
loans w ere noted in sectors sim ilar to those of the overall
business sector, w ith NPLs of SM Es in the m anufacturing
sector recording the largest decline. The NPLs of SM E in the
m anufacturing sector im proved by 12.7% to account for
11.6% of SM E loans to this sector. This w as partly attributed
to im provem ents in credit analysis, credit assessm ent tools
and m ethodologies of banking institutions and enhanced
access to current custom er inform ation.
[Please refer to the section on "Exposure to the
Household Sector" for the analysis on the banking
sectors exposure to the household sector].
W ith sustainable grow th in econom ic perform ance
envisaged in 2006, coupled w ith the continuous
enhancem ents in the risk m anagem ent infrastructure and
practices of banking institutions, the declining trend in NPLs
in the banking system is expected to continue in 2006.
Exposure to the Household Sector
A m idst uncertainties prevailing in the global environm ent,
the level of consum er confidence rem ained high
throughout the year. Private consum ption w as strong
w ith continued high incom e levels, stable labour m arket
conditions, im provem ents in business conditions and
productivity gains. Borrow ings by households continued
to rem ain strong as reflected by the increase in the ratio
of household debts from the banking sector to G D P to
61.5% as at end-2005, as com pared to 45.3% in 2000.
The debt service ratio of consum ers also increased from
29.9% in 2000 to 38.8% in 2005. N evertheless, the
householdslevel of indebtedness as m easured by the
average debt-to-disposable incom e ratio rem ained at
m anageable levels that com m ensurate w ith the capacity
of the sector.
Dem and for financing rem ained strong in 2005, reflected
by an 18% increase in loan applications received from the
sector. Loans approved grew by 12% to RM 97.2 billion,
C05 Banking System pg116-154 4/14/06, 15:04 142
143
The Banking System
w hilst loan disbursem ents recorded an increase of 11.4%
to RM 145.2 billion. As a result, outstanding household
loans expanded by 15.1% to RM 304.4 billion, accounting
for 54.5% of outstanding loans in the banking system as
at end-2005. Lending activities w ithin this sector w ere
concentrated in m ortgage financing, purchase of
passenger cars and credit cards.
The dem and for loans for the purchase of residential
properties m oderated in 2005, driven m ainly by low er
dem and for the purchase of m edium to low er-end
properties, w ith loan approvals for the purchase of
residential properties rising by 2.5% to RM 36.6 billion.
How ever, reflecting the continued high level of
disbursem ents in 2005, outstanding loans to this sector
grew by 12.5% (end-2004: 14.2% ). The NPLs in this
sector grew by 18.2% , to account for 9.4% of loans to
this sector (end-2004: 8.9% ). The average lending rates
charged by the com m ercial banks for these loans rem ained
com petitive, at betw een 2.69% to 3.15% per annum .
The aggressive prom otional activities by car dealers and
m anufacturers and the launching of attractive new m odels
at com petitive prices continued to boost consum er
dem and for m otor vehicles during the year. Loan
applications to finance the purchase of passenger cars
increased by 34.4% to RM 54.5 billion, w hile approvals
grew by 26.1% to RM 38.3 billion during the year. Hence,
outstanding loans to this sector recorded a strong increase
of 19.9% to RM 86.2 billion as at end-2005. In term s of
asset quality, vis--vis the increase in loans, the grow th of
NPLs to this sector m oderated, to account for 4% of loans
to this sector (end-2004: 4.3% ).
A total of 2.6 m illion new credit cards w ere issued in
2005, bringing the total num ber of credit cards in
circulation to approxim ately 8 m illion w ith approved
lim its of RM 57.1 billion. Prom otions to purchase
consum er goods using credit cards, coupled w ith the
com petitive annual fee prom otion contributed tow ards
the stronger grow th in credit cards during the year.
C redit lim its for new credit cards increased by 7.3% to
RM 12.6 billion, w hilst the utilisation of credit card
facilities rem ained strong w ith total disbursem ents
expanding by 17.6% to RM 42.7 billion. N evertheless,
the outstanding balance of credit cards rem ained a
sm all proportion of outstanding loans of the banking
system . W hile the outstanding loans for credit cards
have increased from the previous year, the am ount of
revolving balance has rem ained relatively constant
vis--vis 2004, accounting for about 40% of the
outstanding credit card loans, indicating that 60% of
card users have been servicing their credit card loans
in full. The credit card N PLs accounted for 4.5% of
total credit card loans and 1.4% of total N PLs in the
banking system as at end-2005.
W hile enhancem ents in risk m anagem ent infrastructure
and capabilities of banking institutions have strengthened
their capacity to m anage risk em anating from their
exposure to the household sector, there are em erging
concerns on the ability of the household sector in
m anaging their indebtedness. Hence, Bank Negara
M alaysia has undertaken a series of pre-em ptive m easures
to ensure sustainability of the household sector as follow s:
C onduct concerted efforts to educate consum ers
on financial m anagem ent to enable them to
m ake inform ed decisions and to m anage
financial risks in a proactive and constructive
m anner. This is part of the com prehensive
consum er education program m e initiated in
2003; and
Establish a C redit C ounseling and D ebt
M anagem ent A gency (C C D M A ) to provide
assistance in the form of professional advisory
and debt m anagem ent services to individuals
facing debt problem s that involve m ultiple
financial institutions under the supervision of
Bank N egara M alaysia. The C C D M A is expected
to com m ence operations by 1 A pril 2006.
At the supervisory level, Bank Negara M alaysia has also
undertaken m easures to ensure that the banking
institutionsexposure to the household sector does not pose
undue risk to the stability of the financial sector, as follow s:
Increase the risk-w eightage for m ortgage N PLs
from 50% to 100% for capital adequacy
purposes; and
C onduct them atic exam inations on individual
banking institutions, focusing on the adequacy
and robustness of their risk m anagem ent
practices on lending to the household sector.
Liquidity Management
The banking system continued to operate w ithin an
environm ent of high liquidity in 2005. This w as m ainly
attributed to the sustained large current account
The households level of
indebtedness as measured by
the average debt-to-
disposable income ratio
remained at manageable
levels that commensurate with
the capacity of the sector.
C05 Banking System pg116-154 3/14/06, 9:14 PM 143
144
surplus, foreign direct investm ent throughout the year
and portfolio inflow s resulting in further increase in the
international reserves from RM 253.5 billion as at
end-2004 to RM 266.4 billion as at end-2005. To
absorb the excess liquidity, Bank N egara M alaysia
continued to undertake active liquidity m anagem ent
through its m oney m arket operations in the form of
direct borrow ings, repos and issuance of Bank N egara
Bills and N egotiable N otes. For the first 11 m onths of
2005, the w eighted average overnight interbank rate
stabilised at 2.70% w hile the w eighted average one-
w eek interbank rate fluctuated w ithin a tight range
from 2.71% to 2.74% per annum . A rising from the
increase in the overnight policy rate by 30 basis points
to 3.0% at end-N ovem ber 2005, the w eighted
average overnight and one-w eek interbank rates w ere
higher at 3.0% and 3.04% per annum respectively as
at end-2005. Total outstanding m oney m arket
operations by Bank N egara M alaysia in the form of net
direct borrow ings, repos and issuance of Bank N egara
M alaysia papers w as RM 119.9 billion at the end of
2005, as com pared to RM 142.6 billion as at end-2004.
Throughout the year 2005, the banking system , as a
w hole, projected sufficient liquidity to m eet any
unexpected w ithdraw als for a period of up to one
m onth. A s at end-2005, the cum ulative liquidity surplus
of the banking system w as projected at RM 67.4 billion
to m eet estim ated liquidity dem ands of up to one w eek
and a surplus of RM 80.7 billion to m eet dem ands of up
to one m onth. A s a group, com m ercial banks, m erchant
banks and Islam ic banks projected large surpluses in the
one-m onth bucket am ounting to 13.1% , 41.6% and
21.2% of their total deposit base respectively. O n an
individual basis, all banking institutions have projected
surpluses, w ell above the regulatory requirem ent in the
one-w eek and one-m onth buckets.
Interest Rate Risk
The banking system s exposure to interest rate risk
(inclusive of price risk of Islam ic exposures) is assessed
using the duration-w eighted net position (D W P)
approach. The D W P approach estim ates the potential
im pact on econom ic value of a banking institution for a
100 basis point shift in interest rates. H ow ever, the
existing D W P approach adopted by Bank N egara
M alaysia does not analyse separately the exposures
arising from Islam ic portfolio w hereby the potential
econom ic value im pact could be m itigated by the
mudharabah-based liabilities.
The banking system s D W P increased by 10.57% to
RM 4.2 billion as at end-D ecem ber 2005, or 5.1% if
expressed as a percentage of capital base of the banking
system . D uring the year, total RM denom inated interest
sensitive assets grew by 9% from end-2004 w ith grow th
concentrated in the one to three m onths m aturity tenure
largely as a result of increased interbank lending, and in
the seven to 10 years m aturity tenure due to the rise in
fixed rate hire purchase loans. The increase in RM
2.5
2.6
2.7
2.8
2.9
3.0
3.1
Jan Feb M ar A pr M ay June July A ug Sept O ct N ov D ec
0
20
40
60
80
100
120
140
160
RM billion % per annum
Bank N egara M alaysia's total m oney m arket operations
W eighted average overnight m oney interbank rate (RH S)
W eighted average 1-w eek interbank rate (RH S)
Graph 5.3
Liquidity in the Banking System
1
in 2005
1
Includes Islam ic banks.
Table 5.6
Banking System: Liquidity Projection as at
31 December 2005
C um ulative Buffer as
m ism atch % of total
(RM billion) deposits
1 w k. 1 m th. 1 w k. 1 m th.
C om m ercial banks
1
51.7 66.6 10.2 13.1
M erchant banks 8.0 7.3 45.6 41.6
Islam ic banks 7.7 6.7 24.1 21.2
Banking system 67.4 80.7 12.1 14.5
1
Includes finance com panies.
N ote: Total m ay not add up due to rounding.
Table 5.7
Banking System: Impact of 1% Rise in Interest Rate
on Capital Strength
D uration-w eighted net position
Im pact on
A s a risk w eighted
RM m illion percentage of capital ratio
capital base (% ) (percentage
point)
A s at end-
2004 2005 2004 2005 2004 2005
Com m ercial banks
1
-3,399 -3,690 -4.8 -4.8 -1.0 -1.1
M erchant banks -366 -472 -7.3 -9.6 -3.9 -8.3
Banking system
2
-3,764 -4,162 -5.0 -5.1 -1.1 -1.2
1
Includes finance com panies.
2
Excludes Islam ic banks but includes price risk of Islam ic type exposures.
N ote: Total m ay not add up due to rounding.
C05 Banking System pg116-154 3/14/06, 9:14 PM 144
145
The Banking System
denom inated interest sensitive liabilities w as low er at 8% ,
m ainly due to the issuance of debt papers and C agam as
funding that had rem aining m aturities of one to three
m onths and four to seven years.
A m ajority of the banking system s interest rate risk w as
concentrated in the three to five and five to 10 years
m aturity buckets, w hich together accounted for 70% of
total net D W P as at end-D ecem ber 2005. This w as
prim arily attributed to the increase in fixed rate loans
w ith rem aining m aturities of m ore than five to 10 years
of 24% or RM 9.1 billion. The increase w as due to the
expansion of hire purchase portfolio am ong banking
institutions that have relatively low er credit exposure to
the retail segm ent in 2005. A s the variable rate hire
purchase financing has only been recently introduced,
fixed rate hire purchase continue to be the predom inant
type of financing registering an increase RM 21.5 billion
to RM 95.5 billion as at end-2005.
Despite the increase in fixed rate loans during 2005, part of
the econom ic value im pact arising from Islam ic fixed rate
loans w hich rose by RM 9.2 billion to RM 41 billion during
the year, w ould have been absorbed by the mudharabah-
based liabilities w hich am ounted to RM 20.7 billion as at
end-2005, should the loss-absorbing nature of such
liabilities be reflected by the DW P approach. O ver the long
term , the use of Islam ic variable rate financing w hich
accounted for 13.5% of total Islam ic loans as at end-2005
w ould also m itigate risk arising from the fixed rate products
typical of Islam ic financing.
A s a group, the D W P of com m ercial banks recorded an
increase of 8.6% to RM 3.7 billion as at end-D ecem ber
2005, due to higher fixed rate loans w ith rem aining
m aturity of m ore than five to 10 years m ainly in the
form of m otor vehicle financing. M erchant banks also
recorded an increase in their D W P from RM 0.4 billion to
RM 0.5 billion as at end-D ecem ber 2005 as a result of
expansion in their holdings of debt securities w ith
rem aining m aturities of m ore than seven years and
taking on net long interest rate forw ards, forw ard rate
agreem ents and futures positions in the m ore than five
year m aturity tenure.
The im pact of the higher holdings of private debt
securities w as also reflected in the increase in the
banking system s interest rate risk by 37.4% to
RM 2 billion or 2.45% of capital base as at end-
D ecem ber 2005, as m easured under the M arket Risk
C apital A dequacy fram ew ork w hich w as introduced by
Bank N egara M alaysia in Septem ber 2004.
U p to 5 >5-10 >10-15 >15-20 > 20
C om m ercial banks
2
M erchant banks
1
Excludes Islam ic banks but includes price risk of Islam ic type exposures.
2
Includes finance com panies.
D uration-w eighted net position as % of capital base
N o. of banking institutions
Graph 5.4
Banking System
1
: Distribution by
Duration Weighted Net Position as a Percentage
of Capital Base as at 31 December 2005
0
2
4
6
8
10
12
14
16
18
> 6 - 12
m ths
> 2 - 3
yrs
> 3 - 5
yrs
> 5 - 10
yrs
> 10 - 15
yrs
> 15
yrs
-60
-40
-20
0
20
40
60
Tenure range
C om m ercial banks
2
M erchant banks
Banking system
1
Excludes Islam ic banks but includes price risk of Islam ic type exposures.
2
Includes finance com panies.
M ism atches (RM billion)
Graph 5.5
Banking System
1
: Net Interest Rate Position
Mismatches as at 31 December 2005
< 1
m th
> 1 - 3
m ths
> 3 - 6
m ths
> 1 - 2
yrs
Table 5.8
Banking System: Impact of Trading Book
Interest Rate Risk on Capital Strength as at
31 December 2005
RM m illions Total interest rate
Interest rate risk
risk/C apital base
(% )
2004 2005 2004 2005
C om m ercial banks
1
906 1132 1.3 1.5
M erchant banks 522 830 10.9 16.8
Banking system
2
1,428 1,962 1.9 2.5
1
Includes finance com panies.
2
Excludes Islam ic banks but includes price risk of Islam ic type exposures.
N ote: Total m ay not add up due to rounding.
C05 Banking System pg116-154 3/14/06, 9:14 PM 145
146
Equity Risk
Equity exposure continues to pose m inim al risk to the
banking system . Total equity holdings by banking
institutions rem ained relatively unchanged at RM 3 billion
as at end-2005 as com pared to RM 3.1 billion as at
end-2004. This represented only 0.3% of the banking
system s total assets as at end-2005. The lack of
m ovem ent in total equity holdings reflected few er
restructuring exercises that w ere com pleted by banking
institutions, as w ell as the m ore m odest perform ance of
the stock m arket during the year.
The holdings of quoted shares by the banking system
recorded an increase of 3.5% during 2005, despite the
declining trend for the m ajor part of the year. Q uoted
shares held by the banking system registered a decline of
18.2% in the first three quarters of the year, to RM 1.4 billion
as at end-Septem ber 2005, reflecting cautious sentim ents
in the stock m arket, influenced by underperform ance of
m ajor counters in the KLSE and concerns over
unfavourable external factors such as rising oil prices,
w hich triggered the selling dow n of shares. How ever, the
decline in holdings of quoted shares by the banking system
w as m itigated by several conversions of loans into quoted
shares through restructuring activities. Consequently, there
w as an increase in the holdings of quoted shares in the
fourth quarter of 2005 by 26.6% to RM 1.8 billion as at
end-2005.
Investm ents in unquoted shares by the banking system
recorded an overall decline of 11% , from RM 1.3 billion
as at end-2004 to RM 1.2 billion as at end-2005. This
w as largely attributed to the decline in the holding of
unquoted shares am ongst com m ercial banks, by 12.2% ,
from RM 1.2 billion as at end-2004 to RM 1.1 billion as at
end-2005, as a result of several share redem ption
activities by corporate borrow ers that had been
previously involved in debt restructuring.
O nly the m erchant banks as a group recorded an
increase in equity holding of 9.1% , m ainly from quoted
shares received from loan equity conversions. A s a
result, the ratio of quoted shares to capital base rose
from 6.4% as at end-2004 to 7.1% as at end-2005. The
m ajority of banking institutions m aintained an equity
risk exposure of less than 2% of their capital base as at
end-2005.
Reflective of the low er volatility of the Kuala Lum pur
C om posite Index (KLC I) in 2005, the potential m axim um
loss in equity value for the banking system based on a
10-day volatility of the KLC I as at end-2005 w as low er
at 4.5% or 0.1% of capital base, com pared to 7.7% or
0.2% of capital base as at end-2004.
Graph 5.6
Banking System
1
: Composition of Equity
Investments
Loan conversion
61.8%
U nquoted shares
38.7%
D ebt satisfaction
5.1%
U nderw riting
2.7%
Q uoted shares
61.3%
M arket
purchase
30.4%
As at 31 December 2005
U nquoted shares
42.3%
Loan conversion
60.1%
U nderw riting
2.3%
Q uoted shares
57.7%
M arket
purchase
35.1%
D ebt satisfaction
2.5%
As at 31 December 2004
1
Includes Islam ic banks.
Table 5.9
Banking System: Equity Exposure
Equity
1
holdings Equity
1
/
Potential
(RM m illion) C apital base (% )
equity
1
loss/
C apital base (% )
A s at end-
2004 2005 2004 2005 2004 2005
C om m ercial banks
2
1,409.3 1,449.5 1.9 1.9 0.1 0.1
M erchant banks 320.8 351.2 6.4 7.1 0.5 0.3
Islam ic banks 34.8 26.5 1.8 0.8 0.1 0.0
Banking system 1,764.8 1,827.2 2.2 2.2 0.2 0.1
1
A m ount of investm ent in quoted shares.
2
Includes finance com panies.
0-<2 2-<4 4-<8 8-<13 13-<20 >20
Equity as % of capital base
1
Includes finance com panies.
Graph 5.7
Banking System: Distribution by Equity as a
Percentage of Capital Base as at 31 December 2005
N o. of banking institutions
C om m ercial banks
1
M erchant banks
Islam ic banks
0
5
10
15
20
25
C05 Banking System pg116-154 3/14/06, 9:14 PM 146
147
The Banking System
Foreign Exchange Risk
The exposure of the banking system to foreign
exchange risk rem ained m anageable in 2005 w ith the
net open foreign currency positions (N O P) trending
dow nw ards, particularly in the second half of the year.
Foreign currency liabilities, m ainly in the form of
foreign currency interbank borrow ings, increased
during the year as banking institutions undertook
forw ard exchange arbitrage activities in the currency
sw ap m arket. The N O P declined from RM 3 billion to
RM 0.8 billion during the year, w ith the m ost
substantial reduction of RM 2.9 billion recorded in
N ovem ber. A s a percentage of the banking system s
capital base, the N O P contracted from 3.7% in 2004
to 1% in 2005.
Total foreign currency assets of the banking system ,
m ostly in the form of interbank foreign currency
placem ents, w as high in the first half of 2005, w ith the
outstanding am ount equivalent to RM 61 billion as at
30 June 2005. This w as m ainly as a result of continuous
repatriation of export earnings, sustained foreign direct
investm ent and significant inflow s of portfolio
investm ent. The rise in the interbank foreign currency
placem ents that reached the m axim um outstanding
am ount of RM 43.1 billion at end-M ay w as also attributed
to the increase of RM 3.7 billion in foreign currency
deposits accepted by the banking institutions as dom estic
investors took the opportunity of investing in non-ringgit
assets follow ing the liberalisation of the foreign exchange
rules in A pril 2005. D uring the second half of the year,
the trend in the inflow s of the short-term funds reversed.
This reflected the decline in the foreign currency interbank
placem ents by RM 2.7 billion and subsequently the fall in
total foreign currency assets by RM 3 billion.
Total foreign currency liabilities that rem ained relatively
stable in the first half of the year, trended upw ards in the
second half of 2005 due m ainly to the increase in foreign
currency interbank borrow ings by banking institutions.
A lthough U S dollar interest rates rose steadily during the
second half of 2005, banking institutions w ere still
borrow ing foreign currency in the interbank m oney
m arket as they entered into sw ap transactions to hedge
their ow n arbitrage activities in anticipation of the
strengthening of ringgit w hich w as reflected in the
forw ard discount. The expansion in foreign currency
liabilities of the banking system w as also attributed to the
increase in foreign currency intra-group placem ents by
selected foreign banking institutions in view of the
relatively low exposure of foreign currency risk of the
M alaysian subsidiaries. As a result, the net foreign currency
asset position that reached its peak of RM 19.7 billion in M ay
turned into a net foreign currency liabilities position of
RM 12.9 billion at the end of 2005.
Table 5.10
Banking System: Foreign Currency Exposure
N O P N O P/C apital base
(RM m illion) (% )
A s at end-
2004 2005 2004 2005
C om m ercial banks 2,904 571 4.2 0.8
M erchant banks 48 88 1.0 1.8
Islam ic banks 54 125 2.8 2.2
Banking system 3,006 784 3.7 1.0
J F M A M J J A S O N D
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
-25
-35
-15
-5
5
15
25
RM billion % per annum
2005
N et open foreign currency position
N et foreign currency sw ap purchased
N et foreign currency assets (including value spot and tom orrow )
N et outright forw ard foreign currency purchased
U S T-bill secondary m arket rate (RH S)
3-m onth w eighted average interbank m oney m arket rates (RH S)
Graph 5.8
Banking System
1
: Components of Foreign
Currency Exposure
1
Includes Islam ic banks.
2
0
4
6
8
10
12
14
<-10 -10-<-2 -2-<2 2-<5 5-<10 >10
C om m ercial banks
M erchant banks
Islam ic banks
N o. of banking Institutions
Graph 5.9
Banking System: Distribution of Net Open
Foreign Currency Position as at 31 December 2005
N O P as % of capital base
C05 Banking System pg116-154 3/14/06, 9:14 PM 147
148
In the foreign currency forw ard m arket, the forw ard
prem ium s in the U SD /RM rate narrow ed considerably
and turned into a deep forw ard discount of 55 basis
points reflective of the interest rate differentials
increasingly in favour of the U S dollar. N evertheless,
there w as still strong dem and from custom ers to sell
foreign currency forw ard contracts especially in July
and A ugust w hich eased off subsequently follow ing
the shift to a new exchange rate regim e. A s a result,
banking institutionsforeign currency forw ard
contracts purchased m ainly from dom estic non-bank
entities rose from RM 36.1 billion as at end-January to
RM 42.9 billion as at end-A ugust 2005. To m anage the
foreign currency forw ard contracts purchased, banking
institutions undertook foreign currency sw ap
transactions w hich resulted in the increase in foreign
currency sw ap payable by 39.8% to RM 72.7 billion in
July 2005.
Capital Strength
C apitalisation in the banking system w as sustained at
strong levels throughout the year. This developm ent
w as underpinned by continued capital m anagem ent
activities by the banking institutions to low er the cost
of capital and m axim ise value to shareholders. This
included higher dividend paym ents and share buybacks
as w ell as issuance of tier-2 capital and hybrid capital
instrum ents. The strong capital position enabled the
banking institutions to absorb the effects of capital-
related m easures introduced during the year w hich
w ere aim ed at further enhancing the risk-sensitivity of
the capital fram ew ork. Follow ing this, the risk
w eighted capital ratio (RW C R) rem ained com fortably
above 13% during the year. The RW C R w as 13.1% as
at end-2005, w hilst the core capital ratio stood at
10.2% . A t the m icro level, the im pact of the inclusion
of m arket risk factor in the com putation of risk-
adjusted capital on m erchant banks w as relatively
substantial, resulting in a 5.4 percentage points decline
in the RW C R to 17.5% .
The capital base grew by RM 2.3 billion largely on account
of higher tier-2 capital w hich accounted for 83% of the
grow th in total capital. Nonetheless, tier-1 capital
rem ained as the m ajor com ponent, accounting for 70.6%
of total capital. The increase in tier-1 capital during the
year m ainly em anated from the inclusion of RM 2.5 billion
of audited profits and the exercise of ESO S totaling
RM 0.2 billion. In regard to tier-2 capital, there w ere seven
issuances of subordinated debts totaling RM 3.9 billion, of
w hich RM 2.2 billion w as denom inated in USD, hence
enabling the issuers not only to benefit from the relatively
low er US interest rates but also to enhance their presence
in the international capital and debt m arkets.
Risk-w eighted assets recorded a double-digit grow th
of 12.4% during the year. This expansion w as
brought about by a com bination of factors, nam ely
expansion in lending activities, particularly in the SM E
and consum er segm ents, the inclusion of m arket risk
in the capital adequacy fram ew ork and higher capital
charge on m ortgage N PLs. (Please refer to the section
on Lending Activity for details on the performance of
fund-based operations of the banking system). The
increase in risk-w eight for m ortgage N PLs to 100%
since M arch 2005 only resulted in a m arginal decline
of 0.1 percentage point in the RW C R. The
im plem entation of a m arket risk fram ew ork
beginning A pril 2005, how ever, resulted in a larger
decline of 0.8 percentage point in the RW C R. W ith
the inclusion of m arket risk in the risk-adjusted
capital fram ew ork, the level of capital positions of
banking institutions has now becom e m ore reflective
of the various risks facing the banking institutions
instead of m erely credit risk.
Table 5.11
Banking System: Constituents of Capital
A s at end-
A nnual
2004 2005
change
RM m illion RM m illion (% )
Tier-1 capital 64,920.4 65,685.0 764.6 1.2
Tier-2 capital 23,611.6 27,338.6 3,727.0 15.8
Total capital 88,532.0 93,023.5 4,491.6 5.1
Less:
Investm ent in
subsidiaries and
holdings
of other banking
institutions
capital 7,294.7 9,526.6 2,231.9 30.6
C apital base 81,237.3 83,496.9 2,259.6 2.8
Risk assets:
0% 210,391.3 210,324.5 -66.8 0.0
10% 14,669.8 8,226.9 -6,442.9 -43.9
20% 120,316.9 102,207.7 -18,109.2 -15.1
50% 136,487.1 145,916.2 9,429.2 6.9
100% 471,839.2 503,180.5 31,341.4 6.6
Total risk-w eighted
assets 565,613.1 635,610.9 69,997.8 12.4
Risk-w eighted
capital ratio (% )
Banking system 14.4 13.1 -1.3
C om m ercial banks
1
14.1 12.9 -1.2
M erchant banks 22.9 17.5 -5.4
Islam ic banks 12.3 14.2 1.9
N ote: Total m ay not add up due to rounding.
1
Includes finance com panies.
C05 Banking System pg116-154 3/14/06, 9:14 PM 148
149
The Banking System
By asset category, grow th in the 50% risk-w eight category
w as consistent w ith the continued expansion in m ortgage
financing, w hilst the increase in assets in the 100%
risk-w eight category w as attributable to other lending
activities of the banking system and the re-categorisation
Malaysias Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) Programme
Overview
M alaysias Anti-M oney Laundering and Counter Financing of Terrorism (AM L/CFT) regulatory regim e under the Anti-
M oney Laundering Act 2001 (AM LA) continues to evolve in order to keep pace w ith new global trends and
internationally accepted standards, that is, the Financial Action Task Force on M oney Launderings (FATF) 40+9
Recom m endations. As w ith other jurisdictions, M alaysias efforts w ere expanded during the year by extending the
AM LA regulatory net to non-financial businesses and professions, strengthening the AM L/CFT legislative fram ew ork
and ensuring proper im plem entation of m easures to counter m oney laundering and the financing of terrorism .
M alaysia, as the lead shepherd for m oney laundering in the Association of Southeast Asian Nations (ASEAN), has
taken efforts to enhance the skills and know ledge of personnel involved in the fight against m oney laundering and
terrorism financing both at the national and regional level. Various training w orkshops w ere organised/co-organised
by Bank Negara M alaysia and the Southeast Asia Regional Centre for Counter Terrorism (SEARCCT). These training
w orkshops w ere participated by regulatory and law enforcem ent agencies. Besides training w orkshops, regular
dialogues and aw areness program m es w ere conducted for new as w ell as existing AM LA reporting institutions in
M alaysia. The face-to-face interactions have gained the w illing com m itm ent, com pliance and co-operation of the
reporting institutions in playing their critical role in im plem enting the national AM L/CFT m easures.
The N ational C o-ordination C om m ittee to C ounter M oney Laundering (N C C ) that consists of 13 M inistries and
G overnm ent agencies continues to play its role in m obilising and garnering the co-operative efforts from the
relevant dom estic agencies. A m ong others, the N C C established the A M LA Investigation Reference G uide and is
now in the process of establishing the Financial Investigators A ccreditation Program m e. The M inistry of Foreign
A ffairs, w hich is a m em ber of the N C C , has forw arded the A M LA Inform ation Booklet to M alaysian m issions
abroad to apprise these m issions of the efforts taken by M alaysia to enhance its A M L/C FT regim e.
D uring the year, the first offender under the A M LA , a snatch thief, w as successfully convicted after he pleaded
guilty to five counts of m oney laundering charges am ounting to RM 83,216. H e w as sentenced to three years
im prisonm ent on each of the five charges. A nother six persons are also being prosecuted for m oney laundering
offences involving a total of 193 charges and am ounting to RM 71.3 m illion.
As the fight against m oney laundering and terrorism financing requires global collaborative efforts, M alaysia
participates actively in global AM L/CFT initiatives. At the international front, M alaysia achieved the distinction of
being selected at the 8
th
Asia/Pacific G roup on M oney Laundering (APG ) Annual M eeting as the representative for
the South East Asia region in the APG Steering G roup (for a period from July 2005-July 2006). The APG Steering
G roup w as established at the APG Annual M eeting in Septem ber 2003. The m em bership includes a representative
from each of the five broad geographical areas w ithin the APG , nam ely North Asia, Pacific Islands, South Asia, South
East Asia and O thers. The purpose of the APG Steering G roup is to provide the APG Co-chairs and APG m em bers
w ith strategic advice on the structure, functioning and support for the APG . Am ong the roles played by the
m em bers of the Steering G roup is to provide advice on issues of strategic im portance, obtain feedback from sub-
regional m em bers on key issues and influence the APG m em bers to participate in the APG activities.
Enhancing AML/CFT Regime
New AMLA Reporting Institutions
U nder the A M LA , a reporting institution is required to file a Suspicious Transaction Report (STR) directly to Bank
N egara M alaysia if there are reasons to suspect any transaction involving the proceeds of any unlaw ful activities
that are listed in the Second Schedule to the A M LA . Since the enforcem ent of the A M LA on 15 January 2002,
of m ortgage non-perform ing loans. Assets in the 10%
and 20% risk-w eight categories, how ever, declined partly
due to the m aturity of Cagam as debt securities held by the
banking institutions, and outstanding claim s on O ECD and
non-O ECD banks, respectively.
C05 Banking System pg116-154 3/14/06, 9:14 PM 149
150
the A M LA reporting institutions include financial institutions from the conventional, Islam ic and offshore
sectors and non-financial businesses and professions such as law yers, accountants, com pany secretaries as w ell
as the only licensed casino in M alaysia.
D uring 2005, the A M LA reporting obligations w ere invoked on licensed gam ing outlets, Bank Pertanian
M alaysia and notaries public w ith effect from 31 M arch 2005 and on offshore trading agents and listing
sponsors w ith effect from 20 O ctober 2005. N otaries public are required to report to Bank N egara M alaysia any
suspicious transaction in the course of carrying out the follow ing activities for their clients:
(i) buying and selling of im m ovable property;
(ii) m anaging of clients m oney, securities or other property;
(iii)m anaging of accounts including savings and securities accounts;
(iv)organising of contributions for the creation, operation or m anagem ent of com panies; or
(v) creating, operating or m anaging of legal entities or arrangem ents and buying and selling of business
entities.
Increase Reporting Obligations
Bank N egara M alaysia adopts an increm ental approach in invoking the A M LA provisions on the reporting
institutions. This approach ensures that sufficient tim e is given to the reporting institutions to put in place an
effective and efficient A M L/C FT system before the rest of the reporting obligations are invoked on them . In this
regard, the statutory requirem ent to report suspicious transactions w as initially invoked on Pos M alaysia Berhad
w ith effect from 15 January 2003 and on stock brokers and futures brokers w ith effect from 31 M arch 2004.
Subsequently, the rem aining reporting obligations under Part IV of the A M LA w ere invoked on Pos M alaysia
Berhad w ith effect from 31 M arch 2005 and on the stock brokers and futures brokers w ith effect from 20
O ctober 2005. These rem aining reporting obligations include, am ong others, retention of records for a m inim um
period of six years, conducting custom er due diligence as w ell as establishing internal reporting and com pliance
program m e that are designed to safeguard the institutions from being used as conduits by crim inals.
Increase Predicate Offences
In 2005, the num ber of m oney laundering predicate offences in the Second Schedule to the A M LA w as
increased from 168 to 185 serious offences from 27 pieces of legislation. The new predicate offences are from
the C ustom s A ct 1967, Islam ic Banking A ct 1983, Paym ent System s A ct 2003, Takaful A ct 1984, Futures
Industry A ct 1993, Securities C om m ission A ct 1993 and Securities Industry A ct 1983.
Compliance Monitoring
G iven the diversity in the types of A M LA reporting institutions and the large num ber of non-financial
businesses and professions, Bank N egara M alaysia has established appropriate m echanism to effectively
m onitor the reporting institutionscom pliance w ith the A M LA reporting obligations and the relevant A M L/C FT
guidelines. C om pliance m onitoring m ay be by w ay of com pleting Bank N egara M alaysias self-assessm ent
questionnaires by the reporting institutions or A M L/C FT focused internal audit.
In line w ith the non-integrated approach, the relevant functional supervisory authority conducts A M LA
com pliance exam inations on the reporting institutions under their purview . The A M L/C FT exam inations are carried
out as part of the functional supervisory authoritys overall exam ination on the financial institutions concerned. For
this purpose, a com prehensive A M LA supervisory fram ew ork providing the banking supervisors w ith a
docum ented set of uniform processes w as form ulated and established to guide them in their exam ination of
financial institutionsA M L/C FT m easures. The core areas of A M L/C FT exam ination encom pass the follow ing:
i) A M L/C FT infrastructure;
ii) institutions com pliance w ith internal A M L/C FT policies and procedures;
iii) identification of account holders;
iv) m onitoring of transactions;
C05 Banking System pg116-154 3/14/06, 9:14 PM 150
151
The Banking System
v) record-keeping;
vi) detection and reporting of unusual and suspicious transactions;
vii) training and aw areness program m es for em ployees;
viii)internal audit of the A M L/C FT initiatives; and
ix) roles and responsibilities of the A M L com pliance officer.
The A M L/C FT exam ination reports are forw arded to the Financial Intelligence U nit (FIU ) and the findings are
uploaded into the FIU s com pliance database to ensure continuous m onitoring of the reporting institutions
com pliance w ith the A M LA requirem ents. For reporting institutions that are from unregulated industries and
from industries w here the regulatory authorities are not em pow ered to conduct exam inations, Bank N egara
M alaysia w ill supervise these institutions for A M LA com pliance.
Financial Intelligence
Since M ay 2004, Bank N egara M alaysia has im plem ented the Financial Intelligence System (FIN S) that enables the
reporting institutions to subm it STRs through a secure w eb in an efficient and secure on-line environm ent. Bank
N egara M alaysia is in the process of enhancing the FIN S w ith m ore pow erful and advanced intelligence analytical
softw are. Phase II of the FIN S w ill also incorporate i-2 tools that w ill assist Bank N egara M alaysias analysts in
establishing financial links am ong STRs. Based on the analysis of STRs, Bank N egara M alaysia is able to provide
financial intelligence to the relevant law enforcem ent agencies. The financial intelligence provided has enabled the
law enforcem ent agencies to effectively conduct financial investigation on the perpetrators and to establish the
underlying predicate offences as w ell as m oney laundering offences. H ence, Bank N egara M alaysia w ill enhance
the effectiveness of its financial analysts by leveraging on inform ation technology to better detect crim inal
activities and to enable tim ely dissem ination of financial intelligence to law enforcem ent agencies.
Capacity Building
AMLA Awareness Programme
In 2005, Bank N egara M alaysia continued its nationw ide aw areness program m e to ensure that the reporting
institutions effectively im plem ent the A M L/C FT m easures. A series of briefing sessions w ere held for various
categories of the reporting institutions, particularly for the new reporting institutions as w ell as their respective
regulatory and supervisory authorities in order to apprise them of their obligations under the A M LA .
In July 2005, a total of 10 nationw ide AM LA briefing sessions w ere conducted for banking institutions and licensed
gam ing outlets, nam ely the num ber forecast com panies. The briefing sessions for banking institutions w ere
organised by the Institute of Bankers M alaysia (IBBM ) w hile for licensed gam ing outlets, they w ere conducted in
collaboration w ith the Betting Control Unit, M inistry of Finance. The m ain focus of the AM LA briefing sessions for
banking institutions is on Know Your Custom er (KYC) Policyand on the im portance of conducting custom er due
diligence w hen establishing business relations w hile the sessions for gam ing outlets w ere on the subm ission of STRs.
D uring the year, Bank N egara M alaysia w as also invited by the M alaysian A ssociation of C om pany Secretaries to
conduct briefing sessions on A M L/C FT for its m em bers. In total, three sessions w ere conducted in Sabah and
one in Johor Bahru. A s the num ber of com pany secretaries is large and their trade associations are fragm ented,
these briefing sessions have proven to be an effective outreach to the industry to ensure that their m em bers
fully understand their roles in preventing and detecting crim inal activities.
Dialogue Sessions
Bank N egara M alaysia continues to conduct regular dialogue sessions w ith the reporting institutions. These
dialogue sessions w ere effective in updating the reporting institutions on the latest A M L/C FT m easures and to
gather feedback on the effectiveness of the A M L/C FT m easures. The dialogue sessions also provide a platform
for the reporting institutions to raise their concerns and exchange ideas on the best practices to im plem ent the
A M L/C FT m easures effectively. W ith better understanding and co-operation from the reporting institutions,
M alaysias A M L/C FT regim e w ill be m ore effective and efficient.
C05 Banking System pg116-154 3/14/06, 9:14 PM 151
152
Compliance Officer Networking Group (CONG)
The banking institutions have established the C om pliance O fficer N etw orking G roup (C O N G ), w hich is an
inform al consultative forum to discuss and share A M L/C FT issues and concerns. Since its establishm ent in
2003, the banking institutions have benefited from the consultative deliberations at the m eetings of the
com pliance officers from the C O N G . M em bers of the C O N G participate in creating industry standards, suggest
best practices, reinforce the necessity of com pliance and co-operation w ith the authorities and am ongst
them selves in order to m inim ise the potential of being exploited by m oney launderers and terrorist financiers.
The insurance sector also plays an im portant role in the A M L/C FT regim e. The inclusion of investm ent products
w ith the usual portfolio of insurance policies increases the potential for the insurance sector to be exploited as
m oney laundering conduits. A s a result, the respective insurance associations are follow ing the exam ple of the
banking sector in setting up their ow n C O N G . The G eneral Insurance A ssociation of M alaysia (PIA M ), the Life
Insurance A ssociation of M alaysia (LIA M ), the Insurance Brokers A ssociation of M alaysia and the M alaysian
Takaful A ssociation have proposed that separate C O N G s be established for the general insurers, life insurers,
insurance brokers and takaful operators respectively as issues raised m ay be different for different types of
insurance businesses. PIA M has established a C O N G for general insurers in 2005 w hile LIA M has established a
C O N G for life insurers in January 2006. The rem aining insurance associations w ill establish their C O N G s in due
course.
Computer-Based Training Centre
Bank N egara M alaysia has collaborated w ith the U nited N ations O ffice on D rugs and C rim e (U N O D C ) to
establish an A M L C om puter-Based Training C entre (C BTC ) for the relevant agencies in M alaysia. The C BTC w as
launched at the FIU in Bank N egara M alaysia on 30 M ay 2005. The U N O D C s interactive A M L com puter-based
training program m e consists of 13 m odules on legal, regulatory and law enforcem ent A M L m easures.
Participants are assessed through a series of quizzes, pre-tests and post-tests to determ ine their know ledge on
A M L/C FT m easures. This e-learning training initiative helps to enhance the know ledge of personnel from the
law enforcem ent agencies and ensure greater outreach to relevant sectors involved in the fight against m oney
laundering and financing of terrorism . A s at 31 D ecem ber 2005, a total of 48 officials from various N C C
agencies have signed up for the A M L C om puter-Based Training program m e and 22 have com pleted the
training, w hile the rest are at various stages of com pletion.
World Bank E-Learning AML/CFT Programme
A part from the U N O D C com puter-based training program m e, the W orld Bank has also developed an e-learning
A M L/C FT program m e, w hich is currently accessible to seven countries, nam ely M alaysia, Thailand, Vietnam ,
Indonesia, the Philippines, C am bodia and Laos PD R. The e-learning program m e consists of seven m odules
covering the follow ing topics that are related to A M L/C FT:
M odule 1 - Effects on Econom ic D evelopm ent and International Standards;
M odule 2 - Legal Requirem ents to m eet International Standards;
M odule 3 - (a) Regulatory and Institutional Requirem ents;
(b) C om pliance Requirem ents for Financial Institutions;
M odule 4 - Building an Effective Financial Intelligence U nit;
M odule 5 - D om estic (inter-agency) and International C o-operation;
M odule 6 - C om bating the Financing of Terrorism ; and
M odule 7 - Investigating M oney Laundering and Terrorist Financing.
The W orld Bank allow s countries to custom ise the e-learning program m e to their dom estic A M L/C FT regim e.
A s such, Bank N egara M alaysia is currently custom ising the m odules by including the M alaysian A M L/C FT
law s and m easures. U pon com pletion of the custom isation, the Bahasa M elayu version w ill also be
developed. The W orld Bank e-learning program m e w ill be accessible to the governm ent and private sectors
in the follow ing form at:
C05 Banking System pg116-154 3/14/06, 9:14 PM 152
153
The Banking System
i) hardcopy;
ii) C D -RO M ; or
iii) on-line learning m anagem ent system .
The flexibility given by the W orld Bank also allow s the governm ent and private sectors training institutions to
m odify the m odules to suit their training requirem ents.
Training Initiatives
To stay ahead of m oney launderers w ho are increasingly creative in structuring their activities in order to avoid
detection by law enforcem ent officers, Bank N egara M alaysia continues to upgrade the expertise of law
enforcem ent personnel through form al w orkshops and sem inars. The training w orkshops and sem inars w ere
conducted by both internal and external resource persons and experts.
During the year, Bank Negara M alaysia has organised/co-organised and participated in the follow ing training initiatives:
i) The A M LA A dvance N et W orth A nalysis W orkshop, Port D ickson, 20-24 June 2005;
ii) Financial Intelligence Training, Kuala Lum pur, 5-9 Septem ber 2005;
iii) Terrorism Financing Typologies W orkshop, Kuala Lum pur, 14-17 N ovem ber 2005; and
iv) A M L Sem inar and W orkshop, Labuan, 23-24 N ovem ber 2005.
Financial Investigators Accreditation Programme
A t the 19
th
N C C M eeting on 9 N ovem ber 2004, m em bers agreed to develop the A ccreditation of Financial
Investigators Program m e for A M LA investigators. The objective of the A ccreditation Program m e is to develop
financial investigators w ith the relevant skills in conducting financial investigations. The proposed accredited
training program m e consists of the follow ing nine m odules:
i) U N O D C A nti-M oney Laundering C om puter-Based Training;
ii) Legal A spects on Financial Investigation under the A M LA ;
iii) A M LA Investigation: Process & Procedure;
iv) Basic N et W orth A nalysis W orkshop;
v) A dvance N et W orth A nalysis W orkshop;
vi) Forensic A ccounting;
vii) Introduction to C om puter Forensics;
viii)A ttachm ents w ith com m ercial banks & insurance com panies; and
ix) Training on Visual Investigative A nalysis Softw are
It is anticipated that the first batch of accredited financial investigators w ill graduate by the end of 2006.
Challenges Ahead
The year ahead w ill be very challenging for M alaysia as it is scheduled for a second round of M utual Evaluation
jointly by the A PG and the O ffshore G roup of Banking Supervisors (O G BS) in early 2007. The O G BS w ill
evaluate the A M L/C FT regim e of the offshore sector in the Labuan International O ffshore Financial C entre. The
A PG evaluation team w ill assess the effectiveness of M alaysias A M L/C FT system and its com pliance w ith the
FATFs 40+9 Recom m endations based on the revised 2004 M ethodology for A ssessm ent. To carry out this
m assive and im portant exercise, various w orking groups have been established under the N C C to focus on all
the 250 assessm ent criteria. M alaysias current A M L/C FT m easures, law s, regulations, guidelines and fram ew ork
are being review ed to identify gaps and to form ulate rectification m easures.
G oing forw ard, Bank N egara M alaysia w ill continue to be vigilant and respond to evolving A M L/C FT threats as
w ell as A M L/C FT standards and trends by fine-tuning its legal and regulatory m easures, including the invocation
of the A M LA reporting obligations on other categories of financial and non-financial businesses and
professions as recom m ended by the FATF.
C05 Banking System pg116-154 3/14/06, 9:14 PM 153
C05 Banking System pg116-154 3/14/06, 9:14 PM 155
The Islamic Financial System
M anagem ent of the Islam ic Banking System
White Box:Maximising the Potential of
Islamic Banking Business
White Box:The International Centre for
Education in Islamic Finance
Perform ance of the Islam ic Banking System
Islam ic Interbank M arket
156-165
159-161
163-164
165-170
170-172
156
MANAGEMENT OF THE ISLAMIC BANKING SYSTEM
The Islam ic financial system in M alaysia show ed
significant progress in an increasingly liberalised and
com petitive environm ent in line w ith the increased
integration of the M alaysian Islam ic financial system into
the global Islam ic financial landscape. The liberalisation
of the Islam ic banking m arket saw the opening in
A ugust 2005, of the first foreign Islam ic bank licensed
under the Islam ic Banking A ct 1983 (IBA ). Follow ing the
liberalisation of the foreign exchange adm inistration
rules in 2004, greater m arket depth w as dem onstrated
in the Islam ic financial m arket in 2005 as further ringgit-
denom inated Shariah-com pliant financial instrum ents
w ere raised in the dom estic bond m arket by foreign
entities. This not only boosted confidence in the
dom estic capital m arket but contributed to
strengthening the depth and breath of the m arket.
The institutional capacity and capability of the Islam ic
banking players as w ell as the financial infrastructure
and regulatory fram ew ork w ere further strengthened
to achieve the objectives as em bodied in the second
phase of the Financial Sector M asterplan.
Strengthening the corporate governance and risk
m anagem ent system of the Islam ic banking institutions
rem ained as the core agenda throughout the year in
pursuit of an Islam ic financial industry that is robust,
stable and w ith a global outlook in facing the rising
challenges in the overall banking and financial
environm ent. Islam ic subsidiaries of som e dom estic
banking groups have com m enced operations to
capitalise on the full extent of operational flexibility
accorded by the Islam ic banking licence. The
The Islamic Financial System
International C entre for Education in Islam ic Finance
(IN C EIF) w ill be in operation in the second quarter of
2006 to offer professional certification and
postgraduate program m es as part of the efforts to
build the necessary talents and skills in Islam ic finance.
These developm ents are am ong im portant building
blocks in the effort to position M alaysia as a prem ier
international Islam ic financial centre.
Strengthening the corporate
governance and risk
management system of the
Islamic banking institutions
remained as the core agenda
throughout the year.
In conjunction w ith the 30
th
Board of G overnors
A nnual G eneral M eeting of the Islam ic D evelopm ent
Bank held in M alaysia, a sem inar on the 10-Year
M aster Plan for Islam ic Financial Services Industry to
chart the roadm ap for the Islam ic financial services
industry w orldw ide w as held on 22 June 2005. It
provided a platform to deliberate and provide the
foundations for the developm ent of a m aster plan that
w ould outline the blueprint and strategic direction for
a sustained developm ent of the global Islam ic financial
services industry.
In term s of financial perform ance, the Islam ic banking
industry as a w hole show ed com m endable results in
2005, w ith profitability and assets surpassing for the
C onventional
banking
88.7%
C onventional
banking
87.9%
C onventional
banking
88.3%
Graph 6.1
Market Share of Assets, Deposits and Financing as at end-2005
Financing Assets
Islam ic
banking
12.1%
Islam ic
banking
11.3%
Deposits
Islam ic
banking
11.7%
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 156
157
The Islamic Financial System
The IS structure allows the
domestic banking groups to
maximise the full potential
accorded by the universal
nature of Islamic banking
licence under the IBA.
In contrast to the Islam ic w indow structure, w here
Islam ic banking operations reside w ithin the
conventional banking entity, the incorporation of IS
also provides the opportunity to potential institutional
investors, both dom estic and foreign, to participate in
the Islam ic financial activities through direct equity
participation. The liberalised shareholding policy in
the IS, w hereby the equity of the IS can be ow ned up
to 49% by foreign institutional investors, w ill increase
the potential for building strategic partnerships to
acquire new expertise, tap the best international
talents from a broad range of fields and develop new
value-added activities that w ould enhance
com petitiveness and stim ulate greater innovation in
the Islam ic banking industry. In addition, it w ill
support the capital expansion exercise for the IS,
increase the potential to tap regional and
international business opportunities as w ell as
enhance the global integration of the dom estic
Islam ic banking industry.
W hile the IS structure allow s the leveraging of certain
functions of the group, institutions subscribing to the
IS structure are encouraged to invest in dedicated
internal risk m anagem ent system as part of the
m easures to strengthen the financial resilience of these
institutions in line w ith the prudential regulatory and
supervisory standards that have and w ill be issued by
the Islam ic Financial Services Board (IFSB). In February
2006, the IFSB issued tw o standards, nam ely the
C apital A dequacy Standard (C A S) and the G uiding
Principles of Risk M anagem ent (G uiding Principles) for
institutions offering Islam ic financial services. The C A S
provides guidance on the requirem ents for m inim um
capital adequacy to cover for credit, m arket and
operational risks of the Islam ic banking institutions
that is equivalent to the Basel II C apital Fram ew ork
adopted by the conventional banking institutions. A
significant differentiation in the C A S as opposed to
Basel II is in the com putation of RW C R. In Islam ic
banking, given that the risks on asset financed by
profit-sharing investm ent account (PSIA ) holders do
not represent risks to the capital of Islam ic banking
institutions, the C A S allow ed the risk-w eighted assets
first tim e the RM 1 billion and RM 100 billion thresholds
respectively. A ssets increased to RM 111.8 billion,
registering a strong grow th of 17.7% and accounting
for 11.3% of the total assets of the entire banking
system . The m arket shares of Islam ic deposits and
outstanding financing also increased to 11.7% and
12.1% of the industrys total respectively. Total
outstanding financing grew by 16.5% , attributed by the
grow th in new financing approved and disbursed of
55.1% and 19.4% respectively, w hile net non-
perform ing financing ratio declined further to 4.8% at
the end of the year. The Islam ic banking sector
rem ained w ell-capitalised w ith the risk-w eighted capital
ratio (RW C R) sustained above 12% throughout the year.
Strengthening Financial Infrastructure
Follow ing the issuance of three new Islam ic banking
licences under the IBA to foreign Islam ic financial
institutions, the first foreign Islam ic bank com m enced
operations in A ugust 2005 w hile the other tw o foreign
Islam ic banks w ould com m ence operations later in
2006. The expertise brought in by the foreign Islam ic
banks ranging from retail banking to the m ore
sophisticated investm ent banking, w ealth and fund
m anagem ent, real estate developm ent and venture
capital business w ould further enhance the
com petitiveness of the dom estic Islam ic banking
industry, its global linkages and M alaysias position as
an international Islam ic financial centre. O n the other
hand, it w ould entail new regulatory and supervisory
challenges to Bank N egara M alaysia in view of the
different business m odels adopted by these banks.
In tandem w ith the progressive liberalisation of the Islam ic
banking industry, strategic initiatives w ere undertaken to
further strengthen the institutional capacity and financial
resilience of the dom estic Islam ic banking institutions. In
this regard, Bank Negara M alaysia has approved to date,
the transform ation of the "Islam ic w indow " institutional
structure of seven dom estic banking groups into Islam ic
subsidiaries (IS) licensed under the IBA w ithin their
respective banking groups to carry out Islam ic banking
business. Three IS com m enced operations in 2005 w hile
four others w ould com m ence operations in 2006. The IS
structure allow s the dom estic banking groups to m axim ise
the full potential accorded by the universal nature of
Islam ic banking licence under the IBA w hich provides w ider
strategic focus for Islam ic banking institutions to
strengthen their com petitiveness through diverse and
innovative product offerings. These range from retail
banking products to the higher end corporate finance and
investm ent banking products that include private w ealth
and fund m anagem ent as w ell as private equity and real
estate investm ents.
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 157
158
(RW A ) that are funded by the PSIA holders to be
deducted from the total risk-w eighted assets in the
calculation of RW C R.
The G uiding Principles provides specific guidance in
establishing and im plem enting effective risk
m anagem ent practices to cater for the specificities of
the Islam ic financial institutions. The G uiding
Principles set out 15 principles in m anaging six
categories of risk associated w ith the specific features
of Islam ic contracts, nam ely, credit, equity
investm ent, m arket, liquidity, rate of return and
operational risks.
The C A S and the G uiding Principles are the first tw o
international standards that govern the prudential
regulatory and supervisory fram ew ork for Islam ic
banking institutions issued by the IFSB. Thus, Bank
N egara M alaysia w ill collaborate w ith the Islam ic
banking institutions to ensure a sm ooth and
successful im plem entation of both standards.
In N ovem ber 2005, Bank N egara M alaysia introduced
additional m easures to further strengthen the risk
m anagem ent of the conventional banking institutions
operating under the "Islam ic w indow " institutional
structure. These m easures include separate
com pliance on the single custom er lim it for financing
facilities based on the capital funds of the Islam ic
banking portfolio; separate com pliance on the new
liquidity fram ew ork and statutory reserve requirem ent
for the Islam ic banking portfolio; and apportionm ent
of overhead costs and other expenditure incurred in
m anaging the Islam ic banking portfolio. These new
m easures are in addition to the current requirem ent
to observe a separate com pliance w ith the m inim um
RW C R fram ew ork for the Islam ic banking portfolio in
the conventional banking institutions.
Im provem ents w ere also m ade to the G uidelines on
Financial Reporting for Licensed Islam ic Banks (G P8-i)
in June 2005 to incorporate new requirem ents on
accounting policy for securities, in particular, the
classification and m easurem ent of financial securities
under the fair value accounting. The revised G P8-i
requires the Islam ic banks to classify their securities
under the categories of "H eld for trading" (H FT),
"A vailable for sale" (A FS) and "H eld-to-m aturity"
(H TM ). Islam ic banks are required to m easure
securities classified under the H FT and A FS based on
current m arket price or "m ark-to-m arket" valuation
technique follow ing their intention to trade further
these financial securities in the secondary m arket.
Securities under the category of H TM are m easured
based on am ortised cost given the intention to hold
these securities as long-term investm ent. The G P8-i
also specified the rules on reclassification of securities
from one category to another to instil discipline in
ensuring that consistent accounting policy is adopted
on the classification and m easurem ent of financial
securities.
O ther im provem ents m ade to the G P8-i w ere the
requirem ents for the subm ission and publication of
annual and interim financial reports and
enhancem ent of disclosure of the profit equalisation
reserve and unrealized gains or losses on A FS
securities to reflect the apportionm ent betw een the
depositors and the Islam ic banks. The revised G P8-i
w ill further enhance the transparency, com parability
and tim eliness of inform ation on the financial
condition of the Islam ic banks to the various
stakeholders.
In 2005, several new Islam ic financial products w ere
introduced that include residential m ortgage-backed
securities, com m odity-based financing as w ell as
Calculation of RWCR
RWCR =
ELIGIBLE CAPITAL
TOTAL RWA
(Credit Risk + Market Risk) +
Operational Risk Weighted
LESS
RWA FUNDED
BY PSIA
(Credit Risk + Market Risk)
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 158
159
The Islamic Financial System
investm ent and equity-linked products based on
murabahah, musyarakah and mudharabah. The
com m odity-murabahah, am ong others, is a new
feature in the M alaysian Islam ic banking industry
although it has been used extensively in the M iddle
East. It involves a parallel back-to-back arrangem ent
betw een a financial institution and its custom er to
buy and sell certain specified com m odities, such as
alum inium , steel, copper and nickel w hich are listed
on the m ajor com m odity exchanges, on a cost plus
profit basis. It is structured such that a com m odity is
being exchanged on spot basis and the settlem ent
arrangem ent w ill be structured in a m anner to m eet
the various requirem ents. In a deposit taking
arrangem ent, the first sale from bank to custom er w ill
be settled w ith cash (deposit am ount) w hile the
second sale from custom er to bank w ill be on
deferred term s at a pre-determ ined m aturity date.
Sim ilarly, in a financing arrangem ent, the first sale
from custom er to bank w ill be settled w ith cash
(disbursem ent am ount) w hile the second sale from
bank to custom er w ill be on deferred term s at
settlem ent date. The parallel back-to-back
transactions involving the com m odities takes place
sim ultaneously and therefore, does not expose the
parties to the price risk associated w ith the underlying
com m odity.
The subm ission of proposals for the introduction of
new Islam ic financial products to Bank N egara
M alaysia has been successfully autom ated follow ing
the im plem entation of the Product A pproval and
Repository System (PA RS) in February 2006 to
expedite the processing of new products for approval
and provide for a repository of Islam ic banking
products. The new secured online application system
w ill stream line the subm ission of new product
applications from Islam ic financial institutions and
sim plify the process for users by providing them ,
am ong others, the ability to subm it data on new
product application; review the application history;
update existing approved products; and interact w ith
external parties in seeking feedback on the subm itted
products.
In the area of liquidity m anagem ent, Bank N egara
M alaysia has introduced a new Islam ic m onetary
instrum ent, nam ely, Bank N egara M alaysia Sukuk
Ijarah. The Bank N egara M alaysia Sukuk Ijarah w as
issued in February 2006 through a special purpose
vehicle, BN M Sukuk Berhad w ith an issue size of
RM 400 m illion. The proceeds w ere used to purchase
Bank N egara M alaysia's assets w hich w ere then
leased back to the Bank for rental paym ent
consideration and to be distributed to investors as
returns on a sem i-annual basis. U pon the m aturity of
the sukuk, w hich w ould coincide w ith the end of the
lease tenure, BN M Sukuk Berhad w ill resell the assets
to Bank N egara M alaysia at a pre-determ ined price.
The Bank N egara M alaysia Sukuk Ijarah w ill be issued
on a regular basis w ith subsequent issues ranging
from RM 100 m illion to RM 200 m illion. The Bank
N egara M alaysia Sukuk Ijarah w ill add to the diversity
of liquidity instrum ents used by Bank N egara M alaysia
in m anaging liquidity in the Islam ic m oney m arket as
w ell as to serve as a benchm ark for other short to
m edium -term Islam ic bonds.
Strengthening Shariah Framework
Bank N egara M alaysia continued to m onitor the
im plem entation of the Shariah governance
fram ew ork follow ing the issuance of the G uidelines
Maximising the Potential of Islamic Banking Business
The Islam ic Banking A ct 1983 (IBA ) accords a universal banking stature to the Iicensed Islam ic banks. U nder the
IBA , the Islam ic banks are allow ed to conduct the full spectrum of banking business in line w ith Shariah
principles, ranging from the retail-based com m ercial banking business to the m ore sophisticated investm ent
banking business that includes, am ong others, corporate finance, private equity and w ealth m anagem ent
activities. U p till the present, the banking business activities conducted by the Islam ic banks in M alaysia have
largely been based on the traditional banking business m odel. Sim ilar scenario also exists in the Islam ic banking
activities conducted by the conventional banking institutions participating in the Islam ic Banking Schem e.
A pproxim ately 70% of the financing extended by the Islam ic Banking Institutions (IBIs) are sales and lease-
based m odes of financing w hich are m ainly directed to the retail sector to finance the purchase of residential
property and passenger cars.
The universal nature of Islam ic banking business, particularly in the field of investm ent banking, has yet to be
fully exploited. W hile the ratio of fee-based incom e from investm ent banking-related activities to the total
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 159
160
incom e of IBIs has been increasing over the recent years, fee-based incom e still constitute a sm all portion of
the total incom e of the IBIs. In the Islam ic capital m arket, significant potential still rem ains to be tapped in the
origination of Islam ic bonds.
A s com petition intensifies in the retail banking m arket follow ing the progressive liberalisation of the financial
sector, IBIs need to take strategic m oves tow ards enhancing their capacity and capabilities to expand the
traditional scope of banking business and tap the full potential that a universal Islam ic banking licence offers.
This includes venturing into new grow th areas such as private equity investm ents, real estate investm ents,
private banking, and fund and w ealth m anagem ent business. Such a m ove w ould diversify the sources of
earnings for IBIs, enhance returns to shareholders and depositors as w ell as strengthen the capacity to sustain
strong financial perform ance.
In addition, the Islam ic banking licence allow s IBIs to diversify the sources of funding from the traditional
deposit products to take full advantage of the profit-sharing investm ent accounts (PSIA ). PSIA provides the
opportunity to custom ise the risk and rew ard profiles of the financing and investm ent activities on the asset
2000 2001 2002 2003 2004 2005
0
1
2
3
4
5
6
7
8
%
9
Islam ic banking C onventional banking
Graph 1
Ratio of Fee-based Income to Total Income
0
2
4
6
8
10
12
14
16
Graph 2
Participation by Islamic Banking Institutions
in Origination of Islamic Bonds
RM billion (nom inal)
2000 2001 2002 2003 2005 2004
Total Islam ic bonds issued
Islam ic bonds lead arranged by Islam ic banking institutions
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 160
161
The Islamic Financial System
on the G overnance of Shariah C om m ittee for the
Islam ic Financial Institutions (G PS1) w hich cam e into
effect on 1 A pril 2005. Follow ing the G uidelines, the
num ber of Shariah advisers in the Shariah com m ittees
of Islam ic banking institutions and takaful com panies
has increased significantly, and w ould serve as a base
to enlarge the num ber of com petent Shariah experts
in the country. A lthough a m ajority of the Shariah
advisers are academ icians in the field of Fiqh
Muamalat, the com m ittee also includes form er
judges, legal practitioners and econom ists. It is
expected that, w ith a com bination of their diverse
background and expertise, Shariah deliberations not
only be thorough but also add value to the further
developm ent of the industry.
In term s of Shariah supervision, the Bank continued
to assess the com pliance of Islam ic financial
institutions w ith the Shariah principles and
governance process. The Bank also evaluates the
effectiveness of Shariah com m ittees in providing
proper advice and validating the Shariah com patibility
of the daily operational m atters, such as observing
the adequacy of firew alls to ensure no co-m ingling
betw een the Islam ic and conventional funds in the
Islam ic w indow operations. Sim ilarly, the internal
auditors are also required to consciously play their
role in ensuring that Islam ic banking institutions
com ply w ith the Shariah principles by form ulating a
com prehensive audit program m e for Shariah
com pliance and equipping them selves w ith the
required know ledge in perform ing their duty.
In developing and prom oting Shariah dynam ism and
convergence on the international front, Bank N egara
M alaysia undertook tw o im portant initiatives in 2005.
The first initiative is the Shariah Scholars D ialogue
held from 22 to 23 June 2005 in Kuala Lum pur. The
m ain objective of the D ialogue is to prom ote
convergence and harm onisation of Shariah
interpretations and appreciation am ong the Shariah
scholars in the developm ent of Islam ic banking and
finance at the global front. The D ialogue gathered
m ore than 40 em inent Shariah scholars from several
countries including Saudi A rabia, Tunisia, Iran,
Bahrain, Pakistan, Bangladesh, Indonesia and Brunei
D arussalam . The D ialogue has provided a good
netw orking platform to bridge the gap am ongst
Shariah scholars in term s of fostering understanding
and appreciation of Shariah im plem entation in
various jurisdictions and to facilitate the integration
of the dom estic Islam ic financial system w ith the
global Islam ic financial system .
The second initiative undertaken by Bank N egara
M alaysia is the establishm ent of the RM 200 m illion Fund
for Shariah Scholars in Islam ic Finance. The Shariah Fund
w ill provide the resources to finance Shariah research
activities, scholarships for Shariah studies as w ell as
organising the annual international Shariah scholars
dialogue. The Shariah Fund w ill facilitate the creation and
developm ent of com petent Shariah scholars equipped
w ith sound know ledge and expertise in both Islam ic law s
and Fiqh Muamalat to deal w ith the ever-changing and
dynam ism of the Islam ic financial industry.
side in accordance w ith the distinct investm ent preferences and risk appetite of the PSIA holders on the
liabilities side. U nder the C apital A dequacy Standard issued by the Islam ic Financial Services Board (IFSB), the
risk-w eighted assets funded by the PSIA w ould not attract a capital charge, thereby providing an added
advantage to the IBIs.
By exploring beyond the traditional sectors, the IBIs w ould also enrich the diversity of new asset classes for
Islam ic investm ent and further enhance the depth of the Islam ic financial m arkets. This w ould not only
increase the efficiency of the financial interm ediation process in the Islam ic financial system but w ould also
enhance M alaysias position as an attractive international hub for Islam ic finance.
U nder the Financial Sector M asterplan, the Islam ic financial infrastructure has been progressively developed to
build the capacity of IBIs to capitalise on the universal nature of Islam ic banking business. These, am ong
others, include the transform ation of Islam ic w indow s into dedicated Islam ic subsidiaries, the licensing of
foreign Islam ic banking players w ith distinct capabilities in Islam ic investm ent banking activities and the
divestm ent of up to 49% equity interest in IBIs to strategic institutional dom estic and foreign investors. IBIs are
thus able to leverage on this progressive liberalisation policy to forge strategic alliances as w ell as tap new
expertise and grow th opportunities w ithin the dom estic environm ent and abroad to m axim ise the potential of
Islam ic banking business.
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 161
162
D uring the year, the Shariah A dvisory C ouncil (SA C )
of Bank N egara M alaysia deliberated on a num ber of
issues pertaining to Islam ic finance and am ong the
m ain decisions m ade by the SA C are as follow s:
a) Permissibility of Forward Foreign
Exchange Mechanism
The SA C approved a m echanism for forw ard
foreign exchange transaction based on a
binding unilateral prom ise that does not
tantam ount to a contract before the
settlem ent date. In the event of default of the
binding prom ise, the com pensation charge is
allow ed to be im posed on the defaulter.
b) Application of Compensation Charges for
Late Payment of Judgment Debt
The C ourt m ay grant com pensation charges
for late paym ent of judgm ent debt in Islam ic
finance cases based on the average Islam ic
m oney m arket rate or 8% per annum ,
w hichever is low er and shall not be
com pounded.
c) Review the Application of Qardh Hasan in
Islamic Banking Transactions
A s banking businesses involve m ainly
com m ercial deals w ith the purpose of earning
profit, the principle of qardh hasan is not
appropriate to be applied as a m ain contract
for financing. Qardh hasan is m ore suitable for
charity purposes as it is a benevolent loan
contract w ith the possibility of the principal
am ount being w aived. A s an alternative, the
principle of qardh (interest-free loan) m ay be
used as a secondary or com plem entary
contract w herever necessary.
d) Application of Kafalah Contract for
Guarantee Scheme in Islamic Banking
The SA C approved the Islam ic guarantee
schem e based on the kafalah contract for
credit enhancem ent of the sm all and m edium
enterprises (SM E). O riginally, kafalah is
regarded as tabarru contract in w hich the
guarantee is provided based on the spirit of
brotherhood w ithout any consideration.
H ow ever, current banking and financial
transactions have m ade guarantee as a
com m ercial contract w ith the charging of fees.
The charging of fee for kafalah is allow ed
based on the necessity (hajah) for SM E to
obtain financing.
Strengthening Legal Framework
In a heightened com petitive environm ent in the
Islam ic banking and finance industry, it is im perative
that specific attention be given tow ards harm onising
law s and regulations to give full effect to Shariah
requirem ents given the differences betw een the
principles of Shariah and the conventional legal
system . In D ecem ber 2005, the A ttorney G enerals
C ham bers launched the Shariah C om m unity, a sm art
netw orking platform w ith the m ain objective of
addressing the Shariah issues and challenges in the
context of M alaysian regulatory fram ew ork and
legislation. Islam ic finance and takaful have been
identified as tw o of the areas being studied in
collaboration w ith Bank N egara M alaysia.
A s part of the m easures to be continuously consistent
w ith Shariah, to rem ove im pedim ents on Shariah
com pliant product innovation and diversification, and
to encourage participation in Shariah com pliant
instrum ents, the H ire Purchase A ct 1967 is being
review ed to cover Islam ic hire purchase w hilst other
relevant legislation including the N ational Land C ode,
C om panies A ct 1965, C ivil Law A ct 1956 and
C ontracts A ct 1950 are being studied to cater for the
ongoing developm ents of Islam ic banking and
finance. This is in addition to the ongoing review of
the Islam ic banking and takaful legislation by Bank
N egara M alaysia. To further prom ote the tax
neutrality policy, recent am endm ents to the Stam p
A ct 1949, w hich took effect in O ctober 2005,
included a new provision w hich accords instrum ents
for the purchase of goods w ithin the m eaning of the
H ire Purchase A ct 1967 under the concept of bai
bithaman ajil, the sam e stam p duty as conventional
instrum ents of the sam e nature.
In response to the continuous rapid expansion of the
Islam ic financial industry that has correspondingly
increased dem and for Islam ic financial instrum ents,
the G overnm ent Investm ent A ct 1983 w as am ended
in June 2005 to allow the G overnm ent to issue a
w ider range of Islam ic securities. The am ended
legislation, renam ed as the G overnm ent Funding A ct
1983, accorded greater flexibility for the G overnm ent
to source funds from the capital m arket through the
issuance of lease-based and asset-based Islam ic
financial instrum ents. A part from the traditional
G overnm ent Investm ent Issues, the G overnm ent
initiated the issuance of Islam ic Treasury Bills, a short-
term Islam ic securities w ith a m aturity tenor of less
than one year based on the sell and buy back of asset
transactions.
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 162
163
The Islamic Financial System
Enhancing Intellectual Capital Development
A significant m ilestone that took place during the
year has been in the area of prom otion hum an capital
developm ent w ith the establishm ent of the
International C entre for Education in Islam ic Finance
(IN C EIF) that w ill com m ence operations in 2006. The
establishm ent of IN C EIF serves as a catalyst in
creating a large pool of w orld-class experts and high
calibre professionals in Islam ic banking and finance,
to m eet the talent requirem ents of the industry both
dom estically and internationally.
The International Centre for Education in Islamic Finance
Building skills talent is one of the key pre-requisites in supporting the progressive developm ents of Islam ic
finance. H um an intellectual capital is a critical asset that is m uch needed to drive innovation and sustain m arket
com petitiveness to m eet challenges in the Islam ic financial industry. W ith the rapid grow th of the Islam ic
financial system , Bank N egara M alaysia has taken a strategic m ove to establish an international education centre
in Islam ic finance to produce the needed pool of professionals and specialists in Islam ic finance for the dom estic
and global m arkets. The establishm ent of the International C entre for Education in Islam ic Finance (IN C EIF) w ill
prom ote greater linkages betw een the dom estic and international Islam ic financial system and m ake M alaysia as
a leading centre of education in Islam ic finance.
The establishm ent of IN C EIF w as announced by the Prim e M inister of M alaysia at the 3
rd
A SEA N Business and
Investm ent Sum m it in D ecem ber 2005. Extensive pre-operating w ork is underw ay for IN C EIF to com m ence
operations in the second quarter of 2006. Bank N egara M alaysia has set up an endow m ent fund of RM 500
m illion to support this initiative.
IN C EIF is to be a leading international centre for educational excellence in Islam ic finance w ith the objectives of:
facilitating the coordination, planning and im plem entation of hum an capital initiatives for the global
Islam ic financial industry;
developing superior talents for the global Islam ic financial system ;
offering internationally recognised professional certification and postgraduate program m es; and
supplying talented researchers and educators in Islam ic finance.
Programmes
IN C EIF program m es are designed to provide the latest onsite and online teaching techniques w ith unique value
elem ents. IN C EIF w ill also form strategic alliances w ith renow ned local and international institutions of higher
learning to provide joint education program m e through visiting professor and scholar-in-residence schem es.
IN C EIF program m es are categorised into three m ain areas:
1. Professional certification program m e
INCEIF w ill aw ard professional certification, nam ely, Certified Islam ic Finance Professional to qualified Islam ic
finance practitioners. The certification program m e, w hich w ill com m ence in June 2006, consists of three parts:
Part I: Building knowledge
C andidates w ill acquire the necessary know ledge in Islam ic finance from theory and ethics to w ealth
planning and m anagem ent. Validations are done through exam inations, w ritten case studies and project
papers before candidates are conferred as A ssociate M em bers.
The establishment of INCEIF
serves as a catalyst in creating a
large pool of world-class experts
and high calibre professionals in
Islamic banking and finance, to
meet the talent requirements of
the industry both domestically
and internationally.
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 163
164
Part II: Building skills
C andidates w ill obtain the required skills in handling operational issues and Islam ic financial
transactions such as structuring corporate financing and issuing Islam ic securities. C andidates have the
option of specialising in specific areas of Islam ic banking and/or takaful. To be conferred as Proficient
M em bers, candidates have to pass exam inations, undertake project papers, develop new products and
prepare transactional docum entations.
Part III: Building competency and experience
This final part is designed to provide articleship program m es w here various activities w ill be designed to
provide candidates w ith practical experience in the Islam ic financial services industry. These include a
m entor-m entee program m e at pre-approved participating Islam ic financial institutions and running a
sim ulation bank via financial laboratory. Candidates w ill have to go through validation processes such as
solving problem s, restructuring exercises, sim ulation and m anagem ent gam es, product conversion
exercises, Shariah and audit com pliance, and interview s in order to be conferred as Practising M em bers.
2. Postgraduate program m es
IN C EIF w ill em bark on its ow n M asters and Ph.D . program m es to produce graduates w ith strong
foundation in Islam ic finance, coupled w ith strong research and developm ent capabilities. The M asters
program m e of IN C EIF w ill be on a highly specialised field of Islam ic finance such as Islam ic W ealth
M anagem ent. C andidates w ill also participate in internship program m es. The program m e w ill com m ence
latest by end 2006.
3. Research and publication program m es
INCEIF w ill set up a w orld-class resource centre and w ill intensively engage in research and developm ent
projects in Islam ic finance as w ell as publication of books, journals and w orking paper series. The certification
and postgraduate program m es w ill facilitate and enhance this program m e by supplying the relevant research
m aterials and publications for academ ic references. INCEIF Educational Colloquium to be held in April 2006
w ill also serve as a platform for INCEIF to assess research m aterials relevant for its research program m es.
INCEIF w ill also develop a com prehensive dom estic and international financial database.
Governance
IN C EIF w ill be headed by a C hief Executive O fficer w ho reports to the Board of D irectors (BO D ). The IN C EIF
G overning C ouncil, com prising prom inent local and international personalities, has been established to advise
the BO D on IN C EIF strategic directions and provide visionary global insights on the learning needs of the
Islam ic financial services industry that w ill enhance the prom inence of IN C EIF. The Professional D evelopm ent
Panel has also been set up as the highest authority in academ ic m atters that is responsible for review ing and
approving the certification and postgraduate m odule program m es and to ensure IN C EIF offers the highest
quality of m odule content and standards for all its program m es.
The establishm ent of IN C EIF com pletes the talent developm ent infrastructure in M alaysias Islam ic financial
industry. The industry-ow ned Islam ic Banking and Finance Institute of M alaysia (IBFIM ) and the Securities
Industry D evelopm ent C entre (SID C ) focus their training program m es to m eet the industry needs at the
technical level w hilst IN C EIF w ill provide interm ediate and advanced know ledge and skills in Islam ic finance.
The International C entre for Leadership in Finance (IC LIF) provides leadership program m es to top m anagem ent
that include top m anagem ent of Islam ic financial institutions. This allow s M alaysia to offer a full range of
Islam ic finance talent developm ent program m e for the global needs of the Islam ic financial services industry.
IN C EIF reflects M alaysias continuous effort and com m itm ent tow ards developm ent of a progressive Islam ic
financial industry by developing and enhancing hum an intellectual capital in Islam ic finance. It is envisaged
that the establishm ent of IN C EIF w ould contribute tow ards supporting the grow th and developm ent of the
global Islam ic financial system .
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 164
165
The Islamic Financial System
Consumer Education
D uring the year, concerted efforts continued to be
accorded to further strengthen the consum er education
and aw areness in Islam ic banking and finance. Bank
N egara M alaysia participated actively in the Islam ic
Banking and Takaful Roadshow 2005 (IBTR) organised by
the A ssociation of Islam ic Banking Institutions M alaysia
(A IBIM ). Bank N egara M alaysia participated in six IBTRs,
nam ely, in Shah A lam , Ipoh, A lor Setar, Johor Bahru,
Putrajaya and Pulau Pinang, w hich m anaged to gather an
average of 20,000 visitors per each IBTR. Bank N egara
M alaysia also participated in the exhibition on Islam ic
banking and finance at the O IC Trade Exhibition
organised by the M alaysian External Trade D evelopm ent
C orporation (M ATRA D E) w hich w as held from 20 to 24
June 2005 and an exhibition in conjunction w ith the
Investors C onference from 22 to 23 June 2005. For the
second consecutive year, Bank N egara M alaysia
participated in the M alaysia International H alal Show case,
organised by the Islam ic D aaw ah Foundation, w hich w as
held from 28 to 31 July 2005.
Moving Forward
W ith the developm ent of a com prehensive Islam ic financial
system that is increasingly becom ing m ore liberalised and
integrated w ith the international financial system , M alaysia
is w ell positioned to develop as an international Islam ic
financial centre. To m eet the rising challenges, the focus
w ill be to strengthen the innovativeness and
com petitiveness of the Islam ic financial services industry in
M alaysia, underpinned by high calibre hum an talents,
w orld-class infrastructure and best international standards.
M alaysia is set to serve as an im portant gatew ay for
institutional and high-netw orth investors to tap investm ent
opportunities in this rapidly grow ing region.
services m arket, and takaful and retakaful activities. To
com plem ent these initiatives are efforts targeted at
m aking M alaysia a centre of excellence in Islam ic
banking and finance education, training, consultancy
and research. This is in view that talent and product
innovation are key factors in sustaining the global
developm ent in Islam ic finance. In addition, it is
envisaged that the dom estic Islam ic banking
institutions w ill continue to expand overseas to
becom e regional Islam ic financial players w ith the
long-term objective of becom ing global players. The
policy direction w ill be to enhance the resilience,
efficiency and capacity of the dom estic Islam ic financial
institutions and the Islam ic financial infrastructure w ith
the aim of intensifying the robustness and stability of
the Islam ic financial system .
PERFORMANCE OF THE ISLAMIC BANKING SYSTEM
The Islam ic banking system continued to show strong
perform ance in 2005, w ith higher profitability and
positive trends in all key financial soundness indicators.
A t the sam e tim e, the level of capitalisation in the
Islam ic banking system w as further strengthened
through new capital injections, enabling the industry to
expand w ith vigour and able to w ithstand unexpected
future shocks. The m ain highlights of the perform ance
of the Islam ic banking system w ere:
Profitability w as higher, contributing to im proved
returns on assets and equity;
Financing activities w ere active w ith higher
dem and from households for the purchase of
residential properties and passenger cars;
Non-perform ing financing ratio continued to trend
dow nw ards, im proving further the asset quality;
Liquidity rem ained am ple w ith financing to
deposits ratio at around 80% ;
Rates of return on mudharabah general
investm ent deposits w as m arginally low er; and
H igh capital adequacy ratios due to strong
capitalisation level.
Profitability
There w as further im provem ent in the profit before tax
and zakat recorded by the Islam ic banking sector due to
higher incom e and low er provisions for non-perform ing
financing, despite increases in overhead and staff costs. In
calendar year 2005, the Islam ic banking sector recorded an
increase of RM 712.5 m illion or 28.7% in net incom e
(2004: RM 307 m illion or 14.1% ), w hile other incom e
increased by RM 47.4 m illion or 12.9% (2004: RM 88
m illion or 11.8% ). At the sam e tim e, overheads rose by
RM 259.3 m illion or 61.5% (2004: RM 37 m illion or 9.6% ),
With the development of a
comprehensive Islamic financial
system that is increasingly
becoming more liberalised and
integrated with the
international financial system,
Malaysia is well positioned to
develop as an international
Islamic financial centre.
Initiatives are being directed at enhancing M alaysias
strength in the origination, issuance and trading of
Islam ic capital m arket and treasury instrum ents, Islam ic
fund and w ealth m anagem ent, offshore Islam ic financial
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 165
166
w hile staff cost rose by RM 164.8 m illion or 61.7% (2004:
RM 38 m illion or 16.6% ). After allocating financing loss
and other provisions of RM 0.9 billion (2004: RM 1.2
billion), the Islam ic banking sector recorded profit before
tax and zakat of RM 1.6 billion for the calendar year 2005
(RM 988.1 m illion in 2004). The better profitability has
increased the return on assets and return on equity to
1.5% and 21% (2004: 1.1% and 15.7% ) respectively,
despite the increase in asset size and capital funds.
Assets
D uring the year, the total assets of the Islam ic banking
sector increased significantly by RM 16.8 billion or 17.7%
to RM 111.8 billion w ith m ore than half of the increase
attributable to a 16.5% (RM 9.5 billion) grow th in total
financing. A s at end-2005, total outstanding financing
am ounted to RM 67.4 billion (2004: RM 57.8 billion) or
60.2% of the total Islam ic banking assets. Investm ent in
securities increased by 28.4% (RM 4.6 billion) during the
year to account for RM 20.8 billion or 18.6% of the total
assets. A t the sam e tim e, deposits placed w ith other
institutions also rose by 26.9% (RM 4.3 billion), to
account for another RM 20.4 billion or 18.2% of the total
Islam ic banking assets. In term s of m arket share, the
largest portion of Islam ic banking assets rem ained w ith
the com m ercial banks in the Islam ic Banking Schem e (IBS)
w ith a share of 53.4% , follow ed by the Islam ic banks
(38.8% ) and the IBS discount houses (5.3% ). In term s of
the grow th in assets, Islam ic banks recorded the highest
grow th of 74.7% arising from the transform ation of
three "Islam ic w indow s" into Islam ic banks, follow ed by
IBS com m ercial banks (10.7% ) and IBS discount houses
(0.5% ).
Financing Activities
D uring the year, there w as a higher num ber and
am ount of financing applications received by the Islam ic
banking institutions. In tandem w ith the increase in
financing approvals of 55.1% , financing disbursem ents
increased by 19.4% . Financing repaym ents also
recorded an increase of 25.3% as the overall econom ic
condition im proves.
A rising from the active financing activities, total
financing expanded by 16.5% or RM 9.5 billion in
2005, (19% or RM 9.2 billion in 2004). Supported by
the strong consum er spending, consum er financing
Table 6.1
Islamic Banking System: Income and Expenditure
For the
calendar year
2004 2005p
RM m illion %
Incom e
1
net of
incom e-in-suspense 4,298.6 5,220.2 921.6 21.4
(Income-in-suspense) 306.2 234.5 -71.7 -23.4
Less: Expense
1
1,813.9 2,023.0 209.1 11.5
N et incom e 2,484.7 3,197.2 712.5 28.7
Add: O ther incom e 368.1 415.5 47.4 12.9
Less: Staff cost 267.0 431.8 164.8 61.7
O verheads 421.5 680.8 259.3 61.5
Profit before provisions 2,164.3 2,500.1 335.8 15.5
Less: Financing loss & other
provisions 1,176.2 945.3 -230.9 -19.6
Pre-tax profit 988.1 1,554.8 566.7 57.4
Return on assets (% ) 1.1 1.5
Return on equity (% ) 15.7 21.0
1
From financing activities and securities
p Prelim inary
A nnual change
Table 6.2
Islamic Banking System:
Sources and Uses of Funds
A nnual change
A s at end-
2004 2005p
2005p
RM m illion
Sources
C apital and reserves 1,137.4 2,615.2 10,051.7
D eposits 16,907.1 11,047.9 83,874.8
Funds from other financial
institutions -2,902.9 429.5 4,459.1
O ther liabilities 2,542.4 2,697.0 13,437.9
Total 17,684.0 16,789.6 111,823.5
Uses
C ash 15.9 58.6 329.2
Reserve w ith
Bank N egara M alaysia -158.3 567.5 1,925.9
D eposits w ith other financial
institutions 7,239.7 4,314.8 20,374.9
Financing 9,227.5 9,523.2 67,364.6
Securities -1,776.2 4,600.7 20,800.9
O ther assets 3,135.4 -2,275.2 1,028.0
p Prelim inary
Table 6.3
Islamic Banking System: Financing Activities
For the year
A nnual change
2004 2005p
(% )
RM m illion
Financing approvals 17,273.0 26,789.2 55.1
Financing disbursem ents 41,088.6 49,058.7 19.4
Financing repaym ents 33,679.0 42,207.5 25.3
A s at end-
A nnual change
2004 2005p
(% )
RM m illion
O utstanding financing 57,841.3 67,364.6 16.5
p Prelim inary
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 166
167
The Islamic Financial System
continued to account for the largest com ponent
(36.2% ) of financing extended by the Islam ic banking
institutions, m ainly for the purchase of passenger cars,
w hile the broad property sector recorded the second
largest com ponent of financing, com prising 34% of
the total financing, extended m ainly to the residential
property sub-sector. In 2005, financing for the
purchase of passenger cars constituted 29.9% of the
total financing, w hile financing for the purchase of
residential properties constituted 23.8% . The higher
household dem and w as as the result of attractive and
com petitive financing packages offered by the Islam ic
banking institutions. U nder the business sector,
financing extended to the m anufacturing sector
accounted for 11.2% of the total financing as at
end-2005 (end-2004: 10.6% ). In term s of financing
concept, financing based on the bai bithaman ajil
concept rem ained dom inant, constituting 40.7% of the
total financing, albeit at a low er percentage com pared
w ith last year (49.9% ). In contrast, financing based on
ijarah increased to 31.6% of the total financing (2004:
24% ) follow ing the increase of RM 5.8 billion in
passenger car financing.
The Islam ic banking sector continued to support the
expansion of sm all and m edium enterprises (SM E). In
2005, financing approvals and disbursem ents to SM E
increased by 32.7% and 19.7% respectively. Total
financing to the SM E provided by the Islam ic banking
institutions increased by 7.7% to reach RM 8.6 billion as at
end-2005 (end-2004: RM 8 billion) to account for 33.6%
of the total Islam ic business financing as at end-2005.
Asset Quality
The asset quality of the Islam ic banking sector im proved
further during the year. The gross and net non-
perform ing financing (N PF) ratios as at end-2005 stood
at 7.7% (2004: 8.1% ) and 4.8% (2004: 5.2% )
respectively based on a 6-m onth classification. The net
N PF ratio of the Islam ic banking institutions sustained
w ithin the range of 4.7% to 5.3% throughout the year.
Financing loss coverage rem ained high at 58.7% of the
total N PF as at end-2005 (2004: 61.6% ). In term s of
absolute am ount, financing loss coverage increased to
RM 3.5 billion as at end-2005 from RM 3.1 billion as at
end-2004. The general and specific provisions set aside
by the Islam ic banking institutions increased by 16.7%
and 27% respectively during the year, w hile incom e-in-
suspense decreased by 11.1% . The general provision for
Table 6.4
Islamic Banking System: Direction of Financing

A nnual change
A s at end-
2005p
2004 2005p
RM m illion
A griculture, hunting,
forestry and fishing 466.9 40.8 2,369.3
M anufacturing 1,725.8 1,406.9 7,519.5
M ining and quarrying 13.1 28.3 104.9
Electricity, gas and w ater supply 470.3 -300.2 419.1
W holesale and retail trade,
restaurants and hotels 1,273.9 317.1 3,388.0
Wholesale trade 1,141.3 148.9 2,392.2
Retail trade 126.5 167.1 905.0
Restaurants and hotels 6.1 1.1 90.8
Broad property sector 1,926.2 512.4 22,923.1
Real estate 94.5 66.3 972.7
Construction 597.4 -199.3 3,331.6
Purchase of residential
property 1,047.0 581.7 15,974.7
Purchase of
non-residential property 187.3 63.6 2,644.1
Transport, storage and
com m unication 152.2 111.0 1,287.5
Finance, insurance and business
services 172.0 22.0 1,999.0
Financial services -37.8 178.7 1,376.3
Insurance -0.4 -1.7 1.4
Business services 210.2 -154.9 621.3
C onsum ption credit 3,458.9 7,255.1 24,376.1
Personal uses 811.3 1,289.9 3,738.2
Credit cards 155.8 155.1 467.1
Purchase of consumer
durables -10.5 -5.6 38.0
Purchase of passenger cars 2,502.3 5,815.8 20,132.8
Purchase of securities -43.0 42.4 920.3
Purchase of transport vehicles -525.2 25.1 706.6
C om m unity, social and personal
services 115.2 216.7 635.2
O thers 22.0 -154.4 716.0
p Prelim inary
Graph 6.2
Islamic Banking System:
Major Financing Concepts as at end-2005
M urabahah
6.9%
O ther Islam ic
concepts
19.6%
Bai' Bitham an A jil
40.7%
M udharabah
& M usyarakah
0.3%
Istisna'
0.9%
Ijarah
31.6%
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 167
168
the Islam ic banking sector rem ained at 2.2% of the
total net financing, reflecting the prudent stance
adopted by the Islam ic banking institutions.
The broad property sector continued to account for the
largest share of N PF, at 60.6% (2004: 66.7% ). The high
N PF in the broad property sector w as recorded in the
residential property, w hich increased by RM 383.9 m illion
(21.4% ). The N PF level of the residential property
Table 6.5
Islamic Banking System: Non-performing Financing and Financing Loss Provisions
A s at end-
2004 2005p
C lassification C lassification
3-m onth 6-m onth 3-m onth 6-m onth
RM m illion
Islamic banking system
Total financing 57,841.3 67,364.6
G eneral provisions 1,236.5 1,236.1 858.9 1,443.0 1,443.4 1,053.0
Incom e-in-suspense 640.5 661.2 633.8 569.5 582.6 554.6
Specific provisions 1,183.2 1,239.4 1,170.6 1,502.5 1,547.2 1,461.6
N on-perform ing financing 4,968.2 6,313.4 4,710.5 5,991.8 6,653.1 5,167.3
N et N PF ratio (% )
2
5.6 7.9 5.2 6.0 6.9 4.8
Total provisions/N PF (% ) 61.6 49.7 56.5 58.7 53.7 59.4
Islamic banks
Total financing 11,423.1 20,627.1
G eneral provisions 163.4 163.4 163.4 353.0 353.0 353.0
Incom e-in-suspense 204.1 215.3 204.1 278.7 291.8 276.3
Specific provisions 468.1 501.7 468.1 626.8 661.5 621.6
N on-perform ing financing 1,668.7 2,152.7 1,668.7 2,399.6 2,957.1 2,320.5
N et N PF ratio (% )
2
9.3 13.4 9.3 7.6 10.2 7.2
Total provisions/N PF (% ) 50.1 40.9 50.1 52.4 44.2 53.9
Commercial banks
3
Total financing 38,802.1 45,398.5
G eneral provisions 930.6 930.2 553.0 1,056.8 1,057.2 666.8
Incom e-in-suspense 328.3 330.4 321.6 260.2 260.2 247.7
Specific provisions 558.0 565.6 545.4 797.0 803.5 761.3
N on-perform ing financing 2,800.1 3,411.7 2,542.4 3,422.0 3,445.6 2,676.6
N et N PF ratio (% )
2
5.0 6.6 4.4 5.3 5.4 3.8
Total provisions/N PF (% ) 64.9 53.5 55.9 61.8 61.6 62.6
Finance companies
3
Total financing 6,823.4 1,070.9
G eneral provisions 129.6 129.6 129.6 26.8 26.8 26.8
Incom e-in-suspense 100.5 107.9 100.5 22.7 22.7 22.7
Specific provisions 138.6 153.6 138.6 49.2 52.7 49.2
N on-perform ing financing 389.6 639.2 389.6 122.9 203.1 122.9
N et N PF ratio (% )
2
2.3 5.8 2.3 5.1 12.8 5.1
Total provisions/N PF (% ) 94.7 61.2 94.7 80.3 50.3 80.3
Merchant banks
3
Total financing 792.7 268.1
G eneral provisions 12.9 12.9 12.9 6.4 6.4 6.4
Incom e-in-suspense 7.6 7.6 7.6 7.9 7.9 7.9
Specific provisions 18.5 18.5 18.5 29.5 29.5 29.5
N on-perform ing financing 109.8 109.8 109.8 47.3 47.3 47.3
N et N PF ratio (% )
2
10.9 10.9 10.9 4.3 4.3 4.3
Total provisions/N PF (% ) 35.5 35.5 35.5 92.3 92.3 92.3
1
Financing classified as N PF based on individual banking institutions N PF classification policy i.e. 3-m onth or 6-m onth classification
2
N et N PF ratio = (N PF less IIS less SP) / (G ross financing less IIS less SP) x 100%
3
Refers to Islam ic banking portfolio of conventional banking institutions participating in Islam ic Banking Schem e and represents a subset of the figures reported under
the total banking system for com m ercial banks, m erchant banks and finance com panies
p Prelim inary
A ctual
1
A ctual
1
increased from 36% as at end-2004 to 36.3% as at
end-2005. A part from the broad property sector,
there w as also an increase of RM 258.1 m illion in N PF
in financing for the purchase of transport vehicles.
Liquidity
There w as am ple liquidity in the Islam ic banking
system throughout 2005. Total deposits recorded a
significant grow th of 15.1% or RM 11 billion to reach
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 168
169
The Islamic Financial System
RM 83.9 billion as at end-2005. The IBS com m ercial
banks contributed the m ajor share (51% ) of the total
deposits in the Islam ic banking sector (2004: 54.6% ),
follow ed by the Islam ic banks of 42.5% (2004: 28.5% ).
A m ong the Islam ic banking players, the Islam ic banks
recorded the highest grow th rate in deposits of 71.7%
m ainly due to the transform ation of three "Islam ic
w indow s" into Islam ic banks, follow ed by the IBS of
com m ercial banks w hich recorded a grow th of 7.5% .
Investm ent deposits (general and specific) continued to
capture a m ajor portion of the Islam ic banking deposits,
contributing 53.2% (2004: 57.6% ) of the Islam ic
Graph 6.3
Islamic Banking System:
Net Non-Performing Financing Ratio
1
%
18
16
14
12
10
8
6
4
2
0
2000 2001 2002 2003 2005p 2004
Islam ic banking system Islam ic banks
C om m ercial banks Finance com panies
M erchant banks
1
Based on actual classification
p Prelim inary
By Institution By Type
Graph 6.4
Islamic Banking System: Deposits by Institution and Type as at end-2005
Finance
com panies
0.8%
M erchant banks
0.9% D iscount houses
4.8%
O thers
1.8%
Savings
deposits
11.3%
N ID s
16.2%
D em and
deposits
17.6%
Specific
investm ent
deposits
10.5%
G eneral
investm ent
deposits
42.6%
C om m ercial
banks
51.0%
Islam ic banks
42.5%
banking deposits. H ow ever, investm ent deposits only
grew by 6.2% , w hile savings and dem and deposits
grew by 12.7% and 14.5% respectively m ainly due to
the increase in the retail custom er base in Islam ic
banking. In term s of the m aturity profile of general
investm ent deposits, 96.2% continued to be
concentrated at the shorter end of the yield curve,
m ainly in the one to three-m onth m aturity tenure as the
increm ental return betw een the shorter and longer
placem ent tenures continued to rem ain sm all. The
average rates for deposits rem ained stable in 2005.
Financing to deposits (FD ) ratio of the Islam ic banking
institutions show ed a favourable trend. The FD ratio
increased from 79.4% as at end-2004 to 80.3% as at
end-2005 due to higher percentage increase in the total
financing base (16.5% ) com pared to deposits (15.1% )
during the period.
Rates of Return
The rates of return distributed to the various tenures of the
mudharabah general investm ent deposits (G ID) by the Islam ic
banking institutions continued to decline in 2005. The
average rate of return of 1-m onth ranged from 2.40% to
2.63% (2004: 2.63% to 2.87% ) and 3-m onth G ID ranged
from 2.57% to 2.76% (2004: 2.73% to 2.93% ) respectively.
The declining trend in the rates of return w as attributed to the
m arginal increase in the average m onthly net distributable
incom e, w hich w as not proportionate to a higher grow th in
the average m onthly G ID. During the year, the average
m onthly net distributable incom e grew by RM 30 m illion that
contributed to a m arginal increase of 0.01 tim es of profit
payable to outstanding G ID across all tenures. How ever, the
corresponding outstanding m onthly average of G ID increased
by 13.6% or RM 34.5 billion in 2005.
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 169
170
D uring the year, the Islam ic banking institutions
allocated an additional RM 12.4 m illion from the gross
incom e to the profit equalisation reserve (PER) account.
A s at end-2005, the outstanding PER stood at RM 481.1
m illion as com pared w ith RM 468.7 m illion in 2004. The
increase in PER provides the additional buffer for Islam ic
banking institutions to sustain com petitive rate of return
and sm oothen the potential negative im pact w hile
operating in an increasing interest rate environm ent in
the dual banking system .
Capital Strength
The Islam ic banking sector rem ained w ell capitalised
thus enabling the sector to sustain the RW C R and core
capital ratio above 12% and 10% respectively
throughout the year. The total capital base of the
Islam ic banking institutions increased from RM 7.9
billion as at end-2004 to RM 10.2 billion as at end-
2005, m ainly due to new capital brought in w ith the
setting up of three new Islam ic subsidiaries and a new
foreign Islam ic bank, as w ell as new capital injections
and audited profits. Total risk-w eighted assets of the
Islam ic banking system grew by 16.2% or RM 10.1
billion in the past 12 m onths. The grow th w as
apparent in the 0% and 100% risk categories (RM 1
billion and RM 8.5 billion respectively). A s at end-2005,
the Islam ic banking system recorded a strong RW C R of
14.1% and core capital ratio of 11.3% .
The RW C R of the Islam ic banks and IBS com m ercial
banks stood at 14.3% and 14.2% respectively. The
RW C R of the IBS m erchant banks increased from 14.8%
to 22.2% m ainly due to the increase in the capital base
and decrease in the risk-w eighted assets. The RW C R of
the IBS finance com panies w as 10.2% w ith the capital
base declining significantly by 82.1% or RM 700.9
m illion to RM 152.9 m illion as at end-2005 m ainly due
to the rationalisation of capital arising from the m erging
of operations of four IBS finance com panies into their
IBS com m ercial banks w ithin the sam e group. The risk-
w eighted assets of IBS finance com panies also
decreased by 80.5% or RM 6.2 billion.
ISLAMIC INTERBANK MARKET
The value of trading in Islam ic interbank m arket
declined by 36.6% during the year w ith the decrease in
mudharabah interbank investm ent transactions, w hich
constituted m ore than 70% of the total turnover
volum e in the Islam ic interbank m arket. The decline in
mudharabah transactions w as also attributed to the
stable liquidity condition coupled w ith the low er
average rate of return offered in the mudharabah
interbank investm ent transactions. In addition, the
increased issuance of G overnm ent Investm ent Issues
(G II), Islam ic Treasury Bills (ITB) and Bank N egara
N egotiable N otes (BN N N ) also influenced the turnover
volum e of the mudharabah interbank investm ents
follow ing the relatively active trading in the G overnm ent
and Bank N egara M alaysia Islam ic securities. The
increased supply of the Shariah com pliant securities in
the Islam ic m oney m arket has contributed tow ards
strengthening the Islam ic interbank m arket position in
m eeting the increasing m arket dem and for liquid Islam ic
financial assets.
12-m onth
9-m onth
6-m onth
3-m onth
1-m onth
J
3.5
2.5
3.0
2.0
F M
2005
A M J J A S O N D
Graph 6.5
Islamic Banking System:
Average Rates of Return to General Investment
Deposits in 2005
%
Table 6.6
Islamic Banking System: Constituents of Capital
A s at end-
2004 2005p
RM m illion (% )
Tier-1 capital 6,618.1 8,207.5 1,589.4 24.0
Tier-2 capital 1,324.8 2,012.7 687.9 51.9
Total capital 7,942.9 10,220.2 2,277.3 28.7
Less:
Investm ent in subsidiaries 12.8 13.5 0.7 5.5
C apital base 7,930.0 10,196.5 2,266.5 28.6
Risk assets:
0% 22,349.5 23,396.6 1,047.1 4.7
10% 825.3 1,419.9 594.6 72.1
20% 7,422.9 6,258.4 -1,164.5 -15.7
50% 14,706.2 13,588.0 -1,118.2 -7.6
100% 47,234.5 55,707.0 8,472.5 17.9
Total risk-w eighted assets 62,239.0 72,314.0 10,075.0 16.2
Risk-w eighted capital ratio (% )
Islam ic banking system 12.7 14.1
Islamic banks 12.4 14.3
Commercial banks 13.1 14.2
Finance companies 11.1 10.2
Merchant banks 14.8 22.2
p Prelim inary
A nnual change
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 170
171
The Islamic Financial System
In 2005, the G overnm ent of M alaysia issued additional
Islam ic securities am ounting to RM 2 billion, consisting
of G II and ITB of RM 1 billion each. Sim ilarly, Bank
N egara M alaysia also increased the issuance of BN N N by
RM 2 billion during the sam e period. O verall, the
increase in the issuance of G overnm ent and Bank
N egara M alaysia Islam ic securities by RM 4 billion or
26.5% during the year has not only stabilised the
liquidity condition in the Islam ic interbank m arket but
also im proved the supply of class one Shariah com pliant
liquefiable assets in the secondary m arket. In the case of
G II, the new issuance of a 10-year m aturity tenure has
effectively lengthened the benchm ark yield curve of
Islam ic securities.
During the year, the total am ount of liquidity surplus
absorbed through the conduct of wadiah interbank
acceptance m echanism has reduced as a consequence of
the increase in the issuance of Islam ic securities. The daily
average outstanding am ount of liquidity absorbed under
this m echanism decreased by 15% from RM 3 billion in
2004 to RM 2.6 billion in 2005. The stable liquidity position
in the Islam ic interbank m arket has led to a steady
turnover volum e of an average of RM 21 billion m onthly as
w ell as stabilised the rate of return in the mudharabah
interbank investm ent transactions, w hich registered an
average indicative overnight rate of return of 2.6% .
During the year, the trading of Islam ic m oney m arket
papers recorded m oderate grow th in term s of turnover
volum e and largely centred on the Islam ic securities issued
by the G overnm ent and Bank Negara M alaysia. The
trading of the Islam ic Accepted Bills (AB-i) in the secondary
m arket continued to be captive as the issuers prefer to
hold the short-term paper until m aturity due to the
relatively attractive earnings offered by this paper. Sim ilarly,
the trading of Negotiable Islam ic Debt Certificate (NIDC-i)
also recorded m oderate grow th of 4.9% corresponding
w ith the increase in the creation of this instrum ent in the
Table 6.7
Islamic Interbank Market: Turnover Volume
2004 2005p A nnual change
RM billion %
Total 562.5 356.5 -206.0 -36.6
Mudharabah Interbank
Investment* 485.7 254.7 -231.0 -47.6
Financial Instruments 76.8 101.8 25.0 32.6
Islam ic A ccepted Bills* 10.3 9.4 -0.9 -8.7
N egotiable Islam ic
D ebt C ertificate* 8.2 8.6 0.4 4.9
Bank Negara Negotiable
Notes 21.2 36.1 14.9 70.3
Islam ic Treasury Bills 1.2 4.5 3.3 275.0
G overnm ent Investm ent
Issues 35.9 43.2 7.3 20.3
* Volum e transacted through brokers
p Prelim inary
Table 6.8
Outstanding Islamic Securities
2004 2005p A nnual change
RM billion %
Total 106.8 131.3 24.5 22.9
Government Securities 15.1 19.1 4.0 26.5
G overnm ent Investm ent Issues 9.1 10.1 1.0 11.0
Islam ic Treasury Bills 1.0 2.0 1.0 100.0
Bank N egara N egotiable N otes 5.0 7.0 2.0 40.0
Private Debt Securities 91.7 112.2 20.5 22.3
Khazanah bonds 9.0 10.0 1.0 11.1
C orporate bonds 66.0 75.4 9.4 14.2
C om m ercial papers 3.6 4.4 0.8 22.2
M edium -term notes 10.0 16.7 6.7 67.0
C agam as bonds 2.5 2.5 0.0 0.0
A sset backed securities 0.6 3.2 2.6 433.3
p

Prelim inary
0
10
20
30
40
50
60
RM billion
Graph 6.6
Mudharabah Interbank Investment -
Turnover Volume
J
a
n
-
0
3
M
a
r
-
0
3
M
a
y
-
0
3
J
u
l
-
0
3
S
e
p
-
0
3
N
o
v
-
0
3
J
a
n
-
0
4
M
a
r
-
0
4
M
a
y
-
0
4
J
u
l
-
0
4
S
e
p
-
0
4
N
o
v
-
0
4
J
a
n
-
0
5
M
a
r
-
0
5
M
a
y
-
0
5
J
u
l
-
0
5
S
e
p
-
0
5
N
o
v
-
0
5
Graph 6.7
Mudharabah Interbank Investment -
Share of Turnover Volume
% share
0
20
40
60
80
100
2003 2005 2004
O thers O vernight
69.1
73.6 70.6
30.9
26.4 29.4
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 171
172
prim ary m arket. In 2005, N ID C -i issues increased to
RM 13.6 billion or 51.1% com pared w ith RM 9 billion in
2004. In term s of m aturity tenure, m ore than 45% or
RM 6.1 billion of N ID C -i is of the m aturity of m ore than
one year.
The im provem ent in the supply of short-term Islam ic
governm ent securities through BN N N and ITB has
contributed to a higher trading volum e of these
instrum ents in the secondary m arket. D uring the year,
the turnover volum e of BN N N and ITB grew substantially
by RM 14.9 billion and RM 3.3 billion or an increase of
70.3% and 275% respectively as com pared w ith 2004.
In term s of G II, trading in the longer term governm ent
securities recorded a grow th of 20.3% or RM 7.3 billion
as com pared w ith 2004. The availability of a continuous
and an enlarged supply of these instrum ents w ith
varying m aturity tenure has effectively w idened the
range of tradable Islam ic instrum ents in the Islam ic
interbank m arket.
In term s of total outstanding securities, the Islam ic bond
m arket continued to chart a positive grow th of 22.9% or
RM 24.5 billion. The outstanding Islam ic private debt
securities am ounted to RM 112.2 billion as at end of 2005
accounted for 40% of the total outstanding private debt
securities in the debt m arket. C orporations have actively
sourced funding under the Islam ic principles to lock their
funding cost through the issuance of longer term Islam ic
private debt securities w ith the anticipation of a possible
increase in interest rate in the later part of the year. A n
encouraging developm ent in the M alaysian Islam ic bond
m arket, follow ing the liberalisation of the foreign
exchange adm inistration rules, w as the issuance of a
RM 700 m illion ringgit-denom inated Islam ic debt
securities by an international m ultilateral developm ent
financial institution.
In the m ortgage securities segm ent, C agam as M BS
Berhad issued the inaugural Islam ic residential m ortgage-
backed securities (IRM BS) represented by receivables of
the Islam ic house financing provided by the G overnm ent
of M alaysia. The RM 2.05 billion IRM BS issue is w ith a
m aturity tenure ranging from 3 to 15 years and
structured based on the concept of musyarakah. This
landm ark issuance, w hich w as oversubscribed by 5.4
tim es, has attracted w ide participation from the dom estic
as w ell as the regional investors.
C06 Islamic Financial pg156-172 3/14/06, 9:15 PM 172
Development Financial
Institutions
O verview
Policies and D evelopm ents
Perform ance of D evelopm ent Financial Institutions
174
174-177
177-187
174
Development Financial Institutions
OVERVIEW
The year 2005 m arked a significant m ilestone in efforts to
further strengthen the developm ent financial institutions
(D FIs) w hich are regulated under the D evelopm ent
Financial Institutions A ct (D FIA ) 2002. The rationalisation
exercise involving four D FIs, w as com pleted during the
year, and resulted in the establishm ent of the Bank
Perusahaan Kecil & Sederhana M alaysia Berhad (SM E
Bank) and the m erger of the Export-Im port Bank of
M alaysia Berhad and M alaysia Export C redit Insurance
Berhad (M EC IB). M eanw hile, Bank Pem bangunan dan
Infrastruktur M alaysia Berhad w as restructured and
renam ed Bank Pem bangunan M alaysia Berhad to reflect
its new focus. The rationalisation exercise w as an
im portant initiative to realign the activities of the D FIs
tow ards enhancing their strategic and business focus. In
addition, progress w as also achieved in efforts to
strengthen the capacity and capability of the D FIs, as w ell
as to enhance the prudential fram ew ork aim ed at
strengthening the operations of the D FIs. A ll these
initiatives have contributed to the im proved perform ance
of the D FIs in carrying out their m andated roles.
D uring the year, the D FIs continued to record strong
financing activities to the identified priority and strategic
sectors. Loans outstanding of these D FIs as a group
increased by 25.8% , supported by higher deposits
(7.3% ). Im provem ents w ere also recorded in the non-
perform ing loan ratio and profitability indicators. M oving
forw ard, the perform ance of the D FIs is expected to
im prove further, as they expand the range of products
and enhance the quality and delivery of products and
services, coupled w ith im provem ents in hum an resource,
processes and system s in the D FIs.
capability, as w ell as enhancing the prudential fram ew ork
to further strengthen the operations of the DFIs. These
w ere com plem ented by continuous surveillance and
supervision of the DFIs to ensure that they rem ain focused
on their m andated roles and that their activities are carried
out in a prudent, effective and efficient m anner.
Strengthening Capacity and Capability of DFIs
Realignment of roles and functions
The rationalisation of Bank Pem bangunan dan
Infrastruktur M alaysia Berhad, Bank Industri &
Teknologi M alaysia Berhad (Bank Industri), Export-
Im port Bank of M alaysia Berhad and M EC IB w as
com pleted in the fourth quarter of 2005. The
rationalisation, w hich involved changes to the
institutional structure and functions of these D FIs,
w as aim ed at enhancing their strategic focus in the
respective m andated roles so that these D FIs could
efficiently and effectively m eet the financial and non-
financial needs of the targeted sectors.
The restructuring of Bank Pem bangunan dan
Infrastruktur M alaysia Berhad and Bank Industri
resulted in the establishm ent of SM E Bank, w hich
assum ed the entity of Bank Industri, w hile Bank
Pem bangunan dan Infrastruktur M alaysia Berhad w as
renam ed Bank Pem bangunan M alaysia Berhad (Bank
Pem bangunan) to reflect its new focus. The exercise
involved the transfer of sm all and m edium enterprise
(SM E) loans of Bank Pem bangunan dan Infrastruktur
M alaysia Berhad to the SM E Bank, w hile the
m aritim e and technology-related loans of the form er
Bank Industri w ere transferred to Bank
Pem bangunan. U nder this new institutional
arrangem ent, the SM E Bank becom es a w holly-
ow ned subsidiary of Bank Pem bangunan, w ith a
paid-up capital of RM 1 billion. Both Bank
Pem bangunan and the SM E Bank com m enced
operation on 3 O ctober 2005.
In addition to prom oting the developm ent of the
infrastructure projects, Bank Pem bangunan is also
entrusted to prom ote the developm ent of the
m aritim e sector, as w ell as the capital-intensive and
high technology industries. In financing these sectors,
Bank Pem bangunan not only provides direct
financing, but also arranges for syndicated loans and
offer credit enhancem ent facilities such as bank
guarantees and standby revolving credit to facilitate
greater access to financing for the targeted sectors.
Policy efforts in 2005 for the DFI
sector focused on strengthening
the DFIs capacity and capability,
as well as enhancing the
prudential framework to further
strengthen the operations of the
DFIs.
POLICIES AND DEVELOPMENTS
Policy efforts in 2005 for the DFI sector focused on tw o
broad areas, nam ely, strengthening the DFIscapacity and
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 174
175
Development Financial Institutions
The SM E Bank is a developm ent bank dedicated
tow ards nurturing and prom oting the developm ent
of SM Es. The SM E Bank com plem ents the banking
sector in providing financing to the SM Es, especially
to those that lack track record and collateral, as w ell
as start-ups. In addition to the norm al financial
products such as w orking capital financing and term
loans, the SM E Bank w ould be developing new
innovative products to m eet the requirem ents of
start-ups and SM Es in new grow th areas, including
those in professional services, export-oriented
activities and franchise businesses. A nother
im portant focus of the SM E Bank is to provide a
broad range of advisory services and business
developm ent support to SM Es, including financial
m anagem ent, business diagnosis and m arketing
support. To support the expansion of business
activities of the Bank Pem bangunan G roup, including
the SM E Bank, a total of RM 7 billion w ould be raised
from the capital m arket.
The other part of the rationalisation exercise involved
the m erger of the Export-Im port Bank of M alaysia
Berhad (EXIM Bank) and M EC IB. The m erged entity,
EXIM Bank, is placed directly under the ow nership of
the M inistry of Finance. The m erger led to a creation
of a larger entity w ith bigger financial resources to
focus on prom oting exports of M alaysian goods and
services, as w ell as in providing overseas projects
financing to M alaysian com panies venturing abroad.
In addition, it prom otes greater synergy and
econom ies of scale, w hile reducing potential
duplication of resources, skills and expertise. The
placem ent of the EXIM Bank directly under the
M inistry of Finance w ould enable the bank to
capitalise on its near sovereign status in gaining
better credit rating recognition, and higher
acceptance from the foreign counter parties on
guarantees and insurance coverage issued by the
bank. This w ould provide EXIM Bank w ith m ore
alternative and com petitive sources of funding to
support its business operations, thus allow ing it to
better serve its custom ers and exporters w ith
com petitively priced products and services.
In addition to providing an array of financing
products, guarantee facilities and insurance products
to prom ote M alaysias external trade, EXIM Bank w ill
further strengthen its financial support for M alaysian
com panies to undertake overseas projects. To
facilitate this, as announced in the Budget 2006,
Bank N egara M alaysia is establishing a RM 1 billion
fund at EXIM Bank to assist M alaysian com panies
w hich have secured or are bidding for contracts to
have greater access to financing to undertake their
projects abroad. In addition, as part of the
G overnm ents efforts to enhance SM Esaccess to
financing, the EXIM Bank launched tw o new
products, nam ely, the M ulti-C urrency Trade Finance
and Indirect Exporter Financing Schem e, in January
2006. W ith these products, SM Es can obtain greater
access to financing at attractive costs w ith no
collateral requirem ent to finance their export
activities to the non-traditional m arkets, especially to
the m em ber countries of the O rganisation of Islam ic
C onference.
Strengthening of Bank Pertanian Malaysia
Efforts have been initiated to strengthen the role of
Bank Pertanian M alaysia (Bank Pertanian) in enhancing
access to financing for the agriculture sector and agro-
based industries. Tow ards this end, the financial
capacity and institutional structure of Bank Pertanian
w ill be strengthened, w hile its scope of activities w ill
be w idened to include a broader range of financial
and non-financial products and services. This initiative
is envisaged to increase the effectiveness of Bank
Pertanian in m eeting the needs of the entire value
chain of agriculture activities, w hile continuing to
facilitate the achievem ent of the socio-econom ic
developm ent objectives of the G overnm ent.
Enhancing Advisory Capabilities of DFIs for SMEs
The project to enhance the capabilities of D FIs in
providing consultancy and advisory services to the
SM Es, w hich involved the Japan International
C ooperation A gency, Bank N egara M alaysia and
selected D FIs, w as com pleted in N ovem ber 2005.
Follow ing this, a custom ised action plan w as
form ulated for the SM E Bank, Bank Pertanian and
EXIM Bank, w hich identifies the types of advisory
services to be provided by each of these D FIs, as w ell
as outline the strategies to im prove their operational
infrastructure and develop hum an resource capability
to better provide advisory services. A m ong the
consultancy and advisory services identified include
custom er counselling, basic problem identification and
m anagem ent diagnosis for SM Es, as w ell as the
provision of business m atching services for the SM Es.
The action plans also include strategies for the D FIs to
establish collaborative and strategic alliance w ith the
relevant G overnm ent SM E agencies to leverage on the
expertise and facilities of these agencies, particularly in
the provision of technical support. The collaboration
and netw ork established betw een the D FIs and the
G overnm ent SM E agencies w ould facilitate the SM Es
to have better access to advisory services in a m ore
structured and w ell-coordinated m anner.
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176
Enhancing Prudential Framework for DFIs
Guidelines on the Governance of Shariah
Committee
Bank Negara M alaysia issued the G uidelines on the
G overnance of Shariah Com m ittee to the DFIs under
the purview of DFIA on 31 M ay 2005, to rationalise and
stream line the functions, as w ell as duties of the Shariah
Com m ittees of the DFIs. The guidelines set out the
rules, regulations and procedures of establishing a
Shariah Com m ittee, define the role and responsibilities
of the Com m ittee, as w ell as ensure that the
Com m ittee is com petent and effective in perform ing its
duties and responsibilities. Am ong the duties of the
Com m ittee are to advise the Board of Directors of the
DFIs on Shariah m atters involved in their business
operations, as w ell as other related responsibilities
sim ilar to the Shariah Com m ittees in other Islam ic
financial institutions. The guidelines also define the
relationship and w orking arrangem ent betw een the
Shariah Com m ittee of the DFIs and the Shariah
Advisory Council of Bank Negara M alaysia. The Shariah
Com m ittees of DFIs m ust com prise a m inim um of three
m em bers, and prior approval of Bank Negara M alaysia
needs to be obtained for the appointm ent and
reappointm ent of a Shariah Com m ittee m em ber.
Circular on Takaful Protection for Islamic
Financing
This circular, w hich w as issued on 27 M ay 2005,
requires D FIs to provide Takaful protection for their
Islam ic financing products. This is in line w ith the
Banks efforts to strengthen the Islam ic banking
operations and to stream line practices adopted by
other financial institutions in the industry. The D FIs
w hich provide Islam ic financing are required to offer
Takaful plans to their custom ers in offering
protection for Islam ic financing that needs
coverage. C onventional insurance coverage w ould
only be allow ed as an alternative in the event that a
Takaful plan is not available in the m arket, or is
rejected by custom ers. In such incidents, the
conventional insurance coverage should be offered
separately and not as part of the Islam ic financing
package.
Issuance of Guidelines and Circulars to Bank
Pertanian Malaysia
Follow ing the placem ent of Bank Pertanian under
the purview of Bank N egara M alaysia, a num ber of
existing prudential m easures issued to the
regulated D FIs w ere also extended for
im plem entation by Bank Pertanian. This is to
strengthen its financial and operational soundness,
as w ell as to ensure that it perform s the m andate
to prom ote the developm ent of the agriculture
sector in an effective and efficient m anner.
Monitoring and Supervision of DFIs
In ensuring that the operations of D FIs are carried out in
a prudent, effective and efficient m anner to m eet their
m andated roles, supervisory activities by the Bank in
2005 w ere focused on enhancing the standard of
corporate governance, risk m anagem ent and
operational efficiency of the D FIs.
Strengthening Corporate Governance
In strengthening corporate governance, the quality
and proactiveness of the boards oversight as w ell as
effectiveness of leadership of the D FIs, in term s of
providing strategic direction and contribution
tow ards the overall m anagem ent of the D FIs w ere
assessed. In this context, the roles and functions
perform ed by the board of directors tow ards
enhancing the D FIscapacity, capabilities and
com petitiveness w ere rigorously evaluated.
In the course of on-site exam inations, interview s w ith
m em bers of the board w ere conducted to better
assess the level of participation and contribution of the
directors in m anaging the institutions. The interview s
also provided an avenue for supervisors to discuss
supervisory concerns and m easures, w hilst keeping
abreast w ith issues confronting the D FIs. These
interactions have translated into m ore active
participation am ong the board and senior
m anagem ent of the D FIs in driving the perform ance of
the institutions, including m anaging the stakeholders
expectations, as w ell as im proving their oversight
function. The board and senior m anagem ent w ere
also encouraged to identify and develop clear key
perform ance indicators to gauge the efficiency and
effectiveness of the D FIs in perform ing their m andated
roles. These indicators are to enable the D FIs to
evaluate their perform ance and hence, continually
strive to better m eet the increasing dem and and
challenges of the targeted sectors.
Enhancing Risk Management and Operational
Efficiency
Supervisory activities w ere also directed at ensuring
that the risk m anagem ent practices of D FIs
com m ensurate w ith the m agnitude and com plexity
of the risks assum ed. In this regard, em phasis w as
placed on assessing the effectiveness of asset
m anagem ent and internal control, as w ell as the
adequacy of infrastructure and m anagem ent
inform ation system s to support their business
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177
Development Financial Institutions
operations. D uring the year, the quality of custom er
services w as also assessed to ensure that the D FIs are
able to effectively m eet the needs of their identified
strategic sectors. It w as noted that the D FIs have
m ade im provem ents in areas such as enhancem ent
of policies and operational procedures; putting in
place adequate hum an resource capabilities;
establishing clear lines of responsibilities and
m anagem ent structures, as w ell as strengthening of
the internal audit function. In addition, loan delivery
system s and delivery channels had also im proved.
PERFORMANCE OF DEVELOPMENT FINANCIAL
INSTITUTIONS
The perform ance of the D FIs rem ained favourable, w ith
higher grow th in deposits and strong increase in the
financing activities to support the strategic sectors of
the econom y. A m ong the strategic sectors w hich
received financing from the D FIs w ere the infrastructure,
m anufacturing, agriculture, m aritim e and export sectors,
as w ell as capital-intensive and high technology
industries, and Bum iputera entrepreneurs.
Financing activities of the DFIs
continued to support the
strategic sectors of the
economy.
Financing Activities
Total loans outstanding of the 13 D FIs expanded by
25.8% to RM 47.5 billion as at end-2005 (end-2004:
RM 37.7 billion) to account for 47.4% of total assets of
the D FIs as at end-2005. The strong increase w as driven
largely by the grow th in financing for consum ption
credit extended by Bank Kerjasam a Rakyat M alaysia
Berhad (Bank Rakyat) and loans extended by Bank
Pem bangunan for infrastructure projects. Lending for
consum ption credit rose strongly by 42.2% to account
for 29.6% of the total loans outstanding of the D FIs.
Loans extended to the construction, utilities, and
transport and com m unication sectors as a group
increased by 31.1% , representing 27.8% of total loans.
Favourable grow th w as also recorded in financing to the
m anufacturing and agriculture sectors, w ith total loans
extended to these tw o sectors as a group accounting for
16.5% of D FIstotal loans outstanding. M eanw hile, the
extension of guarantee and credit insurance facilities
rose by 12.4% to RM 4.8 billion as at end-2005 (end-
2004: RM 4.3 billion), due largely to higher guarantees
provided by the C redit G uarantee C orporation M alaysia
Berhad (C G C ).
The six D FIs under the purview of Bank N egara M alaysia
recorded strong grow th in loans outstanding of RM 9.9
billion or 29.6% to RM 43.4 billion as at end-2005 (end-
2004: RM 33.5 billion). The increase in financing
em anated prim arily from retail financing provided by
Bank Rakyat w hich grew by 36% and financing of the
infrastructure projects by Bank Pem bangunan
(+34.1% ). Sim ilarly, lending activities of Bank Sim panan
N asional (BSN ) and EXIM Bank also recorded strong
grow th of 30.9% and 25.6% respectively. H ow ever,
Table 7.1
Development Financial Institutions
1
: Sources and
Uses of Funds
A nnual C hange
A s at end-
2004 2005
2005
RM m illion
Sources:
Shareholdersfunds 1,119.7 2,072.6 12,616.4
Paid-up capital 670.0 701.1 8,563.4
Reserves 451.7 396.8 2,448.1
Retained earnings -2.0 974.7 1,604.9
D eposits accepted 7,474.7 3,658.6 53,536.6
Borrow ings 2,154.1 2,250.7 20,981.6
Government 1,319.9 1,821.3 14,871.4
Multilateral /
International agencies 885.7 602.5 4,646.7
Others -51.5 -173.1 1,463.5
O thers 1,611.0 712.6 13,009.8
Total 12,359.5 8,694.5 100,144.4
Uses:
D eposits placed 2,663.3 -4,796.9 14,111.1
Investm ents 4,327.5 4,174.3 29,731.3
of which:
Government securities -321.5 2,148.5 4,777.8
Shares 1,477.9 1,535.2 9,791.2
Quoted 1,168.2 1,564.6 7,933.7
Unquoted 309.7 -29.4 1,857.5
Loans and advances 5,392.3 9,731.3 47,478.4
Fixed assets 350.2 169.2 4,226.9
O thers -373.8 -583.4 4,596.7
Total 12,359.5 8,694.5 100,144.4
Contingencies:
G uarantee 287.4 455.1 4,404.1
Export credit insurance 185.3 71.8 380.4
Total 472.7 526.9 4,784.5
1
Refers to Bank Pem bangunan M alaysia Berhad, Bank Perusahaan Kecil & Sederhana
M alaysia Berhad (SM E Bank), Bank Kerjasam a Rakyat M alaysia Berhad, Bank
Sim panan N asional, Export-Im port Bank of M alaysia Berhad, Bank Pertanian
M alaysia, M alaysian Industrial D evelopm ent Finance Berhad, C redit G uarantee
C orporation M alaysia Berhad, Lem baga Tabung H aji, Sabah D evelopm ent Bank
Berhad, Sabah C redit C orporation, Borneo D evelopm ent C orporation (Sabah)
Sendirian Berhad and Borneo D evelopm ent C orporation (Saraw ak) Sendirian
Berhad.
Prior to 1 O ctober 2005, data include Bank Industri & Teknologi M alaysia Berhad
and M alaysia Export C redit Insurance Berhad and exclude SM E Bank.
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 177
178
Bank Pertanian registered a m oderate loan grow th of
2.8% , w hile the SM E Bank, w hich began operation in
O ctober 2005, approved RM 333.8 m illion to 202 SM Es
betw een O ctober and D ecem ber 2005. The underw riting
activities of EXIM Bank, including credit insurance and
guarantee facilities from the form er M EC IB, increased by
18.1% (2004: 25.2% ). H igher financing activities by the
D FIs w ere reflected in high approvals and disbursem ents.
Total loans approved by the six D FIs am ounted to RM 16.1
billion (2004: RM 19 billion) w hile total loans disbursed
w ere significantly higher at RM 17.8 billion, com pared
w ith RM 10.9 billion in 2004.
Total gross N PLs of the 13 D FIs as a group declined by
RM 49.3 m illion to RM 5.2 billion as at end-2005. A s a
result of the larger loan base, the gross N PL ratio
im proved to 11.4% as at end-2005 (end-2004: 14.7% ).
For the six D FIs under the purview of Bank N egara
M alaysia, the gross and net N PL ratios im proved to
10.3% and 4.4% respectively (end-2004: 13.2% and
5.5% respectively).
Sources of Funding
Total deposits m obilised by the deposit-taking D FIs
increased by 7.3% to RM 53.5 billion as at end-2005
(end-2004: RM 49.9 billion), to account for 53.5% of
the total resources of the D FIs. D uring the year, savings
by individuals increased by 4.1% to RM 25.5 billion (end-
2004: RM 24.5 billion), accounting for 47.6% of total
deposits m obilised. D eposits from individuals w ere
m ainly m obilised by Lem baga Tabung H aji and BSN .
M eanw hile, deposits m obilised from private business
enterprises and the G overnm ent (including its related
agencies), grew strongly by 16.9% , increasing their
share to 46.7% of total deposits of the D FIs. In addition
to deposits, other sources of funds w ere shareholders
funds w hich increased by RM 2.1 billion as w ell as higher
borrow ings, m ainly from the G overnm ent (RM 1.8
billion).
Bank Pembangunan Malaysia Berhad
In 2005, financing activities of Bank Pem bangunan
continued to rem ain strong, especially lending for the
infrastructure projects. Form erly know n as Bank
Pem bangunan dan Infrastruktur M alaysia Berhad, the
bank evolved follow ing a rationalisation exercise
involving a num ber of D FIs in Septem ber 2005. The
rationalisation resulted in a structural change in the
banks loan portfolio. In addition to providing financing
for infrastructure projects, the bank w as entrusted w ith
Table 7.2
Development Financial Institutions
1
: Direction of
Lending
A nnual C hange
A s at end-
2004 2005
2005
RM m illion
A griculture, forestry
and fishery 387.4 96.2 3,357.6
M ining and quarrying -8.4 -10.2 56.6
M anufacturing 174.2 332.4 4,458.6
Electricity, gas and w ater
supply 611.8 1,024.1 2,253.0
Im port and export,
w holesale and retail trade,
restaurants and hotels 448.4 -55.5 643.3
Broad property sector 1,708.1 1,578.2 11,662.9
Construction 177.2 933.9 5,120.5
Purchase of residential
property 1,150.2 1,397.0 5,475.1
Purchase of non-
residential property 22.8 -34.3 429.6
Real estate 357.9 -718.4 637.7
Transport, storage and
com m unication 231.5 1,179.3 5,844.5
Finance, insurance and
business services -710.5 -173.5 810.7
C onsum ption credit 1,830.0 4,172.5 14,069.0
O thers 719.8 1,587.8 4,322.2
Total 5,392.3 9,731.3 47,478.4
1
Refers to Bank Pem bangunan M alaysia Berhad, Bank Perusahaan Kecil & Sederhana
M alaysia Berhad (SM E Bank), Bank Kerjasam a Rakyat M alaysia Berhad, Bank
Sim panan N asional, Export-Im port Bank of M alaysia Berhad, Bank Pertanian
M alaysia, M alaysian Industrial D evelopm ent Finance Berhad, C redit G uarantee
C orporation M alaysia Berhad, Lem baga Tabung H aji, Sabah D evelopm ent Bank
Berhad, Sabah C redit C orporation, Borneo D evelopm ent C orporation (Sabah)
Sendirian Berhad and Borneo D evelopm ent C orporation (Saraw ak) Sendirian
Berhad.
Prior to 1 O ctober 2005, data include Bank Industri & Teknologi M alaysia Berhad
and exclude SM E Bank.
Table 7.3
Development Financial Institutions
1
: Non-
performing Loans and Loan Loss Provisions
A s at end-
2004 2005
RM m illion
G eneral provisions 735.7 948.6
Interest-in-suspense 1,362.1 1,367.8
Specific provisions 2,095.0 2,085.8
N on-perform ing loans 5,229.6 5,180.3
Percent (% )
G ross N PL ratio
2
14.7 11.4
N et N PL ratio
3
5.5 4.1
Total provisions/N PL 80.2 85.0
1
Refers to Bank Pem bangunan M alaysia Berhad, Bank Perusahaan Kecil &
Sederhana M alaysia Berhad (SM E Bank), Bank Kerjasam a Rakyat M alaysia Berhad,
Bank Sim panan N asional, Export-Im port Bank of M alaysia Berhad, Bank Pertanian
M alaysia, M alaysian Industrial D evelopm ent Finance Berhad, Sabah D evelopm ent
Bank Berhad and Sabah C redit C orporation.
Prior to 1 O ctober 2005, data include Bank Industri & Teknologi M alaysia Berhad
and exclude SM E Bank.
2
G ross N PL ratio = (N PL / G ross loans*) X 100% .
3
N et N PL ratio = (N PL less IIS less SP) / (G ross loans* less IIS less SP) X 100% .
* Excluding loans provided by C redit G uarantee C orporation M alaysia Berhad,
Lem baga Tabung H aji, Borneo D evelopm ent C orporation (Sabah) Sendirian
Berhad, Borneo D evelopm ent C orporation (Saraw ak) Sendirian Berhad and loans
under EC R schem e.
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 178
179
Development Financial Institutions
additional roles of providing m edium - to long-term
financing to the m aritim e sector, as w ell as capital-
intensive and high technology-based industries in the
m anufacturing and other selected sectors. The loan
portfolios in m aritim e and high technology industries of
the form er Bank Industri w ere absorbed by Bank
Pem bangunan. Effective 1 O ctober 2005, the banks
SM E loan portfolio w as transferred to its new ly form ed
subsidiary, SM E Bank.
The banks total loans outstanding increased strongly by
22.7% to RM 14.2 billion as at end-2005 (end-2004:
RM 11.6 billion), led by the strong grow th of 34.1%
(2004: 15.3% ) or RM 3.4 billion in lending to the
infrastructure sector. Both G overnm ent-identified and
private sector projects increased m arkedly by 29.2%
and 47.1% respectively, w ith the form er accounting for
70% of the total loans outstanding for the
infrastructure sector. The bulk of the increase in
infrastructure loans w as channelled to the utilities sector
(RM 1 billion), transport and com m unication sector
(RM 908 m illion) and construction sector (RM 802
m illion). Loans for infrastructure projects am ounting to
RM 4.7 billion w ere disbursed (2004: RM 1.9 billion).
H ow ever, total loans approved to the sector declined to
RM 1.9 billion, com pared w ith RM 7.4 billion in 2004.
The banks lending to its new targeted sectors, nam ely
the high technology and m aritim e sectors totaled
RM 868.3 m illion as at end-2005. Financing to the
m aritim e sector, w hich com prised shipbuilding, shipyard
and m arine-related industries, constituted 78.6% of the
total loans outstanding to the tw o sectors. D uring the
period betw een O ctober to D ecem ber 2005, the bank
approved a total of RM 31.9 m illion loans to the tw o
sectors w hile total loans disbursed am ounted to
RM 107.4 m illion.
Bank Pem bangunans gross N PLs declined to RM 433.4
m illion as at end-2005, due m ainly to the transfer of the
SM E loan portfolio to the SM E Bank. A s a result, the
gross N PL ratio im proved from 7.9% to 3% , w hile the
net N PL ratio im proved to 0.8% (2004: 2.7% ).
Follow ing the rationalisation exercise, Bank
Pem bangunans total investm ents increased to RM 2.6
billion, accounting for 13.7% of total assets. D uring the
year, the investm ent portfolio grew m arkedly by 95.9%
(RM 1.3 billion) attributed prim arily to the acquisition of
shares in a subsidiary of the form er Bank Industri and
investm ent holdings in the SM E Bank. M eanw hile, total
deposits placed w ith financial institutions declined by
RM 2.1 billion due m ainly to the utilisation of funds for
loan disbursem ents as w ell as a transfer of funds to the
SM E Bank.
The m ajor source of funding for Bank Pem bangunan
w as borrow ings from the G overnm ent and m ultilateral
international agencies, w hich am ounted to RM 8.8
billion as at end-2005, form ing the largest com ponent
(57.2% ) of its total liabilities. D uring the year, total
borrow ings rose by 11% (RM 875.9 m illion) reflecting
additional funds received from G overnm ent agencies.
H ow ever, this w as partially offset by the transfer of
borrow ings to the SM E Bank. In 2005, total
shareholdersfunds grew m arkedly by RM 869.2 m illion
to RM 3.8 billion as at end-2005 (end-2004: RM 2.9
billion), contributed m ainly by the share sw ap w ith SM E
Bank (RM 328.7 m illion) as w ell as capital injection by
the G overnm ent (RM 200 m illion).
Bank Perusahaan Kecil & Sederhana Malaysia
Berhad
SM E Bank started operations on 3 O ctober 2005,
follow ing the rationalisation of Bank Pem bangunan
dan Infrastruktur M alaysia Berhad and Bank Industri.
The bank is a subsidiary of Bank Pem bangunan and
has 15 branches to serve the entrepreneurial
com m unity in the country.
Reflecting the G overnm ents com m itm ent to support
SM Es, the SM E Bank com m enced operations w ith a
paid-up capital of RM 1 billion. The loan portfolio of
SM E Bank com prised of all SM E loans transferred from
Bank Pem bangunan and the form er Bank Industri. A s at
end-2005, total assets of the SM E Bank am ounted to
RM 4.9 billion, of w hich 43.5% w ere loans and 22%
w ere deposit placem ents.
Graph 7.1
Bank Pembangunan Malaysia Berhad:
Direction of Lending as at 31 December 2005
O thers
9.2%
M aritim e
4.8%
M anufacturing
2.0%
U tilities
15.7%
C onstruction
30.3%
Transport &
com m unication
38.0%
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 179
180
D uring the initial three m onths of its operations, the
bank approved a total of 202 loan accounts
am ounting to RM 333.8 m illion, of w hich RM 311.2
m illion (or 93.2% of total loans approved) w as
extended to Bum iputera SM Es (193 loan accounts).
Loan approvals w ere m ainly granted to SM Es in the
m anufacturing, construction and business services
sectors. M eanw hile, RM 319.7 m illion of loans w ere
disbursed to 563 loan accounts over the sam e period,
m ainly to SM Es in the m anufacturing, general
com m erce, and transport and com m unication sectors.
In D ecem ber 2005, the bank launched a new product
called SM E professional, w hereby financing is given to
professionals involved in the services industry such as
health care, accounting, consultancy and architecture.
The banks total loans outstanding declined by RM 43.8
m illion to RM 2.1 billion as at end-2005, due to loans
w rite-off am ounting to RM 147.7 m illion. Excluding the
w rite-off, loans outstanding increased by RM 191.5
m illion, channeled m ainly to the m anufacturing,
general com m erce, and transport and com m unications
as w ell as construction sectors. A s at end-2005, loans
to the m anufacturing sector accounted for 43.5% of
total loans outstanding. M eanw hile, loans outstanding
to Bum iputera SM Es declined by RM 6 m illion to
RM 1.7 billion as at end-D ecem ber 2005, representing
79.4% of total loans.
A s at end-2005, SM E Bank m anaged 23 G overnm ent
funds w ith loans outstanding am ounting to RM 1.1
billion or 50.3% of total loans outstanding. D uring
the three m onth period, loan approvals and
disbursem ents under the funds am ounted to
RM 827.4 m illion and RM 1.4 billion respectively,
m ainly through the N ew Entrepreneurs Fund 2 and
Fund for Sm all and M edium Industries 2.
Export-Import Bank of Malaysia Berhad
In tandem w ith the continued expansion of M alaysia's
external trade sector, financing activities of the EXIM
Bank w ere higher in 2005. The banks total loans
outstanding expanded strongly by 25.6% to RM 2.8
billion as at end-2005 (2004: 15.3% ), reflecting
m ainly increased in loans under the G overnm ent-
funded Export C redit Refinancing (EC R) schem e.
Loans outstanding under the EC R schem e, w hich w as
extended m ainly to the palm oil, rubber and chem ical
industries, expanded m arkedly by 27.7% (2004:
4.7% ) to RM 1.5 billion as at end-2005. The strong
dem and for financing under the schem e w as due
largely to the continuous nationw ide prom otion by
EC R participating banks and EXIM Bank, as w ell as
anticipation of higher interest rates in the m arket.
C oncom itantly, loans disbursed under the schem e
increased by 7.7% (2004: 2.3% ).
Loans outstanding under the export financing and
overseas project financing also expanded strongly
during the year, by 38.1% and 20.3% respectively.
C onsistent w ith the bank's role to facilitate the
diversification of M alaysias export m arkets, about
58.7% of total overseas project financing and 38% of
export financing w ere channelled to non-traditional
m arkets. N early one-half of the total overseas project
financing w ere channelled to projects in South-East
A sia, follow ed by A frica (22.4% ) and East A sia (12.7% ).
Graph 7.2
Bank Perusahaan Kecil & Sederhana Malaysia Berhad:
Direction of Lending as at 31 December 2005
G eneral com m erce
16.5%
Transport
& com m unication
13.4%
Broad property
sector
8.4%
M anufacturing
43.5%
Business services
1.3%
O thers
16.9%
Graph 7.3
Export-Import Bank of Malaysia Berhad:
Credit Facilities as at 31 December 2005
EC R schem e
53.1%
O verseas project
financing
37.7%
Export financing
9.2%
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 180
181
Development Financial Institutions
The gross N PL am ount, excluding loans provided under
the EC R schem e, increased to RM 361.6 m illion in 2005
(2004: RM 306.8 m illion). H ow ever, due to larger loan
base, the gross N PL ratio im proved to 27.2% com pared
w ith 28.5% as at end-2004. O verseas project financing
accounted for 97.1% of the N PLs.
Follow ing a rationalisation exercise, effective 1 O ctober
2005, EXIM Bank m erged w ith M EC IB w ith the m erged
entity retaining EXIM Banks nam e and all operations of
M EC IB w as absorbed by EXIM Bank. Total exposure of
the bank arising from its guarantee and export credit
insurance business recorded an increase of 18.1%
during the year (2004: 25.2% ) to RM 993.9 m illion as at
end-2005. Export credit insurance facilities expanded by
23.3% or RM 71.8 m illion during the year to RM 380.5
m illion, w hile guarantee business increased by 15% or
RM 80.2 m illion to RM 613.5 m illion. M edium - and long-
term coverage continued to account for the m ajor
portion of the total exposure w ith 53.8% (RM 534.5
m illion) and the balance 46.2% (RM 459.4 m illion)
constituted of short-term coverage.
Reflecting the banks efforts to prom ote the
diversification of M alaysias export m arkets, 45.5% of
the total exposure w ere to countries categorised as non-
traditional m arkets. In term s of distribution by region,
East A sia w as the largest region accounting for 25.7%
of total exposure, follow ed by South-East A sia (22.8% ),
N orth A m erica (12.7% ), W estern Europe (10.8% ) and
M iddle-East (10.5% ).
Follow ing the m erger, EXIM Banks shareholdersfunds
increased to RM 481.4 m illion due largely to the increase
in paid-up capital of the m erged entity to RM 380.5
m illion. D uring the year, the banks outstanding
borrow ing from the G overnm ent w hich w as utilised
solely for the EC R schem e, rem ained unchanged w hile
borrow ings from international agencies increased by
RM 191 m illion to RM 691 m illion as at end-2005.
D eposit placem ents w hich accounted for 25.1% of the
banks total assets, how ever, declined by 19.9% or
RM 254.7 m illion during the year to RM 1 billion as at
end-2005 (end-2004: RM 1.3 billion).
Bank Kerjasama Rakyat Malaysia Berhad
The total assets of Bank Rakyat increased by 13.2% to
RM 25.3 billion as at end-2005 (end-2004: RM 22.3
billion), contributed m ainly by strong grow th in
financing. The share of total financing outstanding to
total assets increased to 66.6% as at end-2005, from
55.4% as at end-2004. The grow th in financing w as
partially offset by the reduction in both deposit
placem ents and investm ent in securities. D eposits
placed w ith the financial institutions declined by RM 1.2
billion to RM 2.8 billion, w hile holdings in investm ent
securities declined by RM 348 m illion to RM 5 billion as at
end-2005. A s a result, the proportion of these asset
com ponents to total assets declined to 31% as at end-
2005 from 42% the year before.
Total financing outstanding increased strongly by 36%
to RM 16.8 billion as at end-2005 (end-2004: RM 12.4
billion) w ith the increase attributed m ainly to the strong
increase in consum ption credit, especially for personal
loans, w hich grew by 36.3% to RM 10.5 billion. In
addition, financing for the purchase of houses and
vehicles w as also strong, increasing by 40.7% and 70.7%
to RM 3.7 billion and RM 1.1 billion respectively. O f the
total financing outstanding, 62.3% w as extended for
Graph 7.4
Export-Import Bank of Malaysia Berhad:
Contingent Liabilities as at 31 December 2005
Short-term guarantee
9.0%
M edium -and long-term
insurance
1.1%
Short-term insurance
37.2%
M edium -and long-term
guarantee
52.7%
Graph 7.5
Bank Kerjasama Rakyat Malaysia Berhad:
Direction of Financing as at 31 December 2005
O thers
1.7%
M anufacturing
0.6%
A griculture
0.4%
Share financing
0.5%
G eneral com m erce
3.3%
Property
24.5%
C onsum ption credit
62.3%
Purchase of m otor
vehicles
6.7%
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 181
182
consum ption credit, follow ed by the property sector
(24.6% ), and purchase of vehicles (6.7% ). W hile Bank
Rakyats lending to its m em bers increased by RM 2 billion
to RM 11.7 billion at the end of the year, its proportion to
total financing outstanding declined from 78.2% to
69.3% , follow ing higher lending to non-m em bers w hich
increased m arkedly by RM 2.5 billion (2004: RM 0.4 billion)
to RM 5.2 billion. The banks strong financing activities in
2005 w ere reflected in higher financing approvals and
disbursem ents, w hich am ounted to RM 8.2 billion and
RM 9.2 billion respectively. M ainly as the result of its
enlarged loan base, the gross non-perform ing financing
(N PF) ratio im proved to 6.8% from 8.8% , w hile the net
N PF ratio im proved to 2.9% from 4.2% .
D eposits m obilised by Bank Rakyat increased by 14.2%
or RM 2.4 billion to RM 19.5 billion as at-end 2005, due
m ainly to the relatively attractive returns offered by the
bank. The increase in deposits reflected higher
placem ents by business enterprises, w hich increased by
RM 1.2 billion to RM 12.7 billion, to account for 65% of
total deposits as at end-2005. D eposits m obilised from
individuals increased by RM 0.3 billion to RM 2.5 billion.
The banks shareholdersfunds increased to RM 3.7
billion as at end-2005 (end-2004: RM 3.5 billion) m ainly
from higher profits. The bank recorded profits before
tax and zakat of RM 535.5 m illion com pared w ith
RM 460 m illion in 2004. D uring the year, the banks
paid-up capital increased by RM 3.7 m illion to
RM 1,951.9 m illion, reflecting subscriptions by new
m em bers. The paid-up capital of the bank has reached
close to RM 2 billion since Septem ber 2004 follow ing an
upw ard trend in applications for m em bership and
additional shares. A s at end-2005, Bank Rakyats
individual m em bership stood at 693,963 (end-2004:
714,743) w hile the m em bership of cooperatives w as
1,207 (end-2004: 1,172).
Bank Simpanan Nasional
BSN , or N ational Savings Bank, continued to record
strong grow th in deposits m obilised and retail loans
during the year. BSN operations, as at end-2005, w ere
supported by 390 branches and 616 ATM s located in
both the urban and rural areas. To further im prove its
services, BSN joined M alaysian Electronic Paym ent
System (M EPS) in D ecem ber 2005, w hich enable its
custom ers to access ATM s that support M EPS service.
Total deposits m obilised by BSN increased by 19.1% to
RM 13.1 billion at end-2005 (end-2004: RM 11 billion),
due m ainly to placem ents by the G overnm ent. D eposits
of private business enterprises increased by RM 1 billion
during the year, but there w ere net w ithdraw als by
G overnm ent-controlled com panies am ounting to RM 0.4
billion. A s a result, total deposits of business enterprises
increased by RM 0.6 billion or 28.3% to RM 2.6 billion as
at end-2005, to account for 20% of total deposits (end-
2004: 18.5% ). D eposits of individuals increased
m arginally by 1.2% to RM 8 billion as at end-2005 to
account for 60.8% of total deposits (end-2004: 71.6% ).
Fixed deposits accounted for 52.1% of total deposits
accepted, w hile savings deposits com prised 40.1% , and
the rem aining w as general investm ent deposits.
In term s of uses of funds, 56.6% w ere invested in
securities, w hich increased by 37.8% to RM 8.6 billion as
at end-2005. In particular, the holdings of G overnm ent
papers increased by RM 1.6 billion. Loans and financing
accounted for 27.5% of total assets.
Financing activities of BSN rem ained strong in 2005, and
initiatives to introduce Islam ic products w ere successful as
Islam ic financing rose significantly by RM 628.1 m illion to
RM 782.8 m illion as at end-2005. H igher loans w ere
approved and disbursed, am ounting to RM 2.2 billion and
RM 1.6 billion respectively (2004: RM 1.4 billion and
RM 1.3 billion respectively). Total financing outstanding
increased strongly by RM 1 billion or 30.9% to RM 4.2
billion as at end-2005, due m ainly to the significant
grow th in personal loans (RM 0.9 billion) as a result of
attractive low interest rate package. In addition, there
w as also a m arked increase in financing for the purchase
of residential houses of RM 315.7 m illion to RM 1.5 billion
as at end-2005. The m icro credit schem e, w hich w as
launched in June 2003, w as suspended in D ecem ber
2004. A total of RM 723.1 m illion w as disbursed to
88,774 applicants. Follow ing the suspension of the
schem e, efforts w ere focused on im proving repaym ent
Graph 7.6
Bank Simpanan Nasional:
Total Deposits Accepted as at 31 December 2005
G overnm ent agencies
17.0%
Business enterprises
19.9%
Financial institutions
1.2%
O thers
1.1%
Individuals
60.8%
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 182
183
Development Financial Institutions
and recovery, and as a result the outstanding m icro credit
loan outstanding declined to RM 517.1 m illion as at end-
2005 (end-2004: RM 610.7 m illion).
G ross N PLs increased by RM 176.1 m illion to RM 626
m illion as at end-2005, attributed m ainly to the
increase in the N PL of housing loans, m icro credit and
credit card loans. A s a result, the gross N PL ratio
deteriorated from 14.1% at end-2004 to 15% at end-
2005. H ow ever, on a net basis, the N PL ratio im proved
to 6.7% from 7.7% , due m ainly to higher provisioning
for m icro credit.
Bank Pertanian Malaysia
Bank Pertanian M alaysia or A griculture Bank of M alaysia
continued to support the agriculture activities by
providing financing to the entire value chain of the
agriculture sector. In addition to the oil palm industry,
Bank Pertanian continued to extend financing to new
areas, such as support services and agro-based
processing industries. The increase in loans extended to
these industries w as, how ever, largely offset by the
decline in loans to paddy, forestry and livestock sectors.
A s a result, total loans outstanding increased at a
m oderate rate of 2.8% (2004: 14.8% ) to RM 3.2 billion
as at end-2005. D uring the year, RM 716.8 m illion w ere
disbursed, m ainly for agricultural support services
(RM 296.7 m illion) and oil palm (RM 186.4 m illion).
Sm all farm ers continued to be the largest group of
borrow ers, accounting for 98.7% of total num ber of
borrow ers, w ith total loans outstanding of RM 1.7
billion. D uring the year, Bank Pertanian approved
loans totalling RM 865.5 m illion to 37,182 loan
accounts, m ainly to sm all farm ers (99.6% of total
num ber of borrow ers).
Bank Pertanian discontinued the m icro credit schem e
in D ecem ber 2004 as the allocation had been fully
utilised. Since the launch of the m icro credit schem e in
June 2003, Bank Pertanian received a total of 32,173
applications and approved 17,603 applications w ith a
value of RM 202.1 m illion. A total of RM 200 m illion had
been disbursed under the schem e, w ith borrow ers
m ainly involved in trading and m arketing of agricultural
products. A s at end-2005, total loans outstanding of
m icro credit schem e stood at RM 75.7 m illion (end-2004:
RM 117 m illion).
G ross N PLs declined by RM 86.9 m illion to RM 1.2 billion
as at end-D ecem ber 2005, w hich resulted in a low er
gross N PL ratio of 36.5% (end-2004: 40.3% ). Sim ilarly,
net N PL ratio im proved to 18.7% (end-2004: 22.8% ).
In term s of total assets, loans rem ained the largest
com ponent, accounting for 51.5% of total assets,
follow ed by investm ents w hich form ed 27.2% (RM 1.7
billion) of total assets. The investm ents w ere m ainly in
prom issory notes/com m ercial papers (51.6% ), private
debt securities (37.5% ) and unit trusts (28.7% ).
Total deposits outstanding declined by RM 521.1 m illion
or 12.7% (2004: 8.8% ) to RM 3.6 billion as at end-
2005, m ainly due to net w ithdraw al by business
enterprises. N evertheless, deposits, w hich w ere
m obilised through its netw ork of 172 branch offices and
5,634 m obile units nationw ide, rem ained the largest
sources of funds for Bank Pertanian, accounting for
58.5% of total resources. To further enhance services
offered to its custom ers, Bank Pertanian becam e a
m em ber of M EPS in July 2005, thus enabling its
depositors to access ATM s that support M EPS services.
Borrow ings from the G overnm ent am ounted to RM 1.7
billion as at end-D ecem ber 2005 (27.6% of total
resources) m ainly to support the various G overnm ent
financing schem es. Bank Pertanian m anaged 10 funds
w ith loans outstanding am ounting to RM 176 m illion or
5.6% of the total loans outstanding as at end-
D ecem ber 2005.
Malaysian Industrial Development Finance Berhad
The M alaysian Industrial Developm ent Finance Berhad
(M IDF) sustained its lending activities in 2005, w ith total
loans approved and disbursed increasing by 14.3% to
RM 532 m illion (2004: RM 466.1 m illion) and 1.4% to
RM 306.3 m illion (2004: RM 302 m illion) respectively. In order
to enhance its services, M IDF planned to introduce tw o new
supplem entary products, nam ely, the Revolving Credit and
Contract Financing for w orking capital purposes in 2006, to
better m eet its custom ersfinancing requirem ents.
Graph 7.7
Bank Pertanian Malaysia:
Direction of Lending as at 31 December 2005
Fishery
9.8%
Forestry
2.6%
Tobacco
2.1%
Rubber
1.3%
O thers
36.1%
O il palm
22.2%
Livestock
12.4%
Food crops
13.5%
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 183
184
Total loans outstanding declined slightly by 1.3% to
RM 1.1 billion as at end-2005, as the increase in loans
disbursed w as offset by repaym ents. Loans to the
m anufacturing sector rem ained the largest share
(79.5% ) of M ID Fs total loan portfolio. A m ong the
m anufacturing activities benefiting from loans by M ID F
w ere the fabricated m etal products and m achinery
industry (18.4% of total m anufacturing financing),
follow ed by the w ood product industry (15.6% ), basic
iron and steel and non-ferrous product industry (9.8% ),
and transport equipm ent industry (8.5% ). In term s of
borrow er, the SM Es rem ained the m ain beneficiaries,
w ith its share of total loans outstanding increasing
further to 66.4% , com pared w ith 57.8% in 2004.
M eanw hile, as an institution that m anages the G overnm ent
special funds, total outstanding funds m anaged by M IDF
increased by 12.1% to RM 442 m illion as at end-2005 (end-
2004: RM 394.1 m illion). SM Es w ere the m ajor recipients of
financing from these funds, w hich include the Soft Loan for
SM E Fund, Fund for SM I 2 and the Japan Bank for
International Cooperation Fund for SM Is.
Based on a 3-m onth classification, N PLs im proved
significantly in 2005. G ross N PLs, w hich com prised
m ainly N PLs to the m anufacturing sector, declined to
RM 245.9 m illion (2004: RM 362 m illion) w ith gross N PL
ratio im proving to 21.8% (2004: 31.7% ). O n a net
basis, the N PL ratio declined to 9.3% (2004: 12.4% ).
Shareholdersfunds and borrow ings rem ained the m ajor
sources of funds to support activities of M ID F. D uring
the year, despite a slight decline in the shareholders
funds to RM 1.4 billion due to dividend payout, it
rem ained the largest funding source to account for
Graph 7.8
Malaysian Industrial Development Finance Berhad:
Direction of Lending as at 31 December 2005
Fabricated m etal
products
& m achinery
18.4%
Electrical & electronic
products
5.2%
N on-m anufacturing
20.5%
Food, beverages
& tobacco
8.5%
O thers
27.7%
W ood products
15.6%
Plastic products
7.7%
Basic iron & steel and
non-ferrous products
9.8%
N on-m etallic m ineral
products
7.1%
M anufacturing
79.5%
48.7% of M ID Fs total resources. Borrow ings
contributed to another RM 1.2 billion or 40.3% of
M ID Fs total resources. These included borrow ings from
the G overnm ent of RM 561.6 m illion for lending to
support socio-econom ic developm ent and RM 415
m illion funds raised from the capital m arket for use in
corporate lending activities.
Credit Guarantee Corporation Malaysia Berhad
The Credit G uarantee Corporation M alaysia Berhad (CG C)
continued to assist and facilitate SM Es in gaining better
access to financing through the provision of guarantees
and advisory support services. As part of these efforts,
CG C launched the Islam ic Direct Access G uarantee
Schem e (DAG S-i) in Decem ber 2005, aim ed at m eeting
the needs of SM Es w hich utilised Islam ic financing to fund
their activities. During 2005, total guarantees outstanding
expanded by 11.8% to RM 3.7 billion as at end-2005
(end-2004: RM 3.3 billion), m ainly attributed to the grow th
in the m ajor guarantee schem es, nam ely, the Direct Access
G uarantee Schem e (DAG S), the New Principal G uarantee
Schem e and the Flexi G uarantee Schem e. During the year,
total guarantees provided under these schem es increased
by 23.8% , constituting a com bined share of 86.1% of
total guarantees outstanding.
Reflecting continuous efforts in supporting the sm aller
SM Es, loans of less than RM 250,000 w as the largest
com ponent of loans to have benefited from the guarantee
schem es of the CG C, accounting for 81% of the total
num ber of loans guaranteed as at end-2005 (end-2004:
77.7% ). In term s of value guaranteed, loans of betw een
RM 500,000 to RM 1 m illion accounted for 29.3% of the
total guarantees outstanding, follow ed by those of above
RM 1 m illion (25.7% ), and betw een RM 250,000 to
C07 Dev. Financial pg174-188 3/14/06, 9:15 PM 184
185
Development Financial Institutions
2005 (end-2004: RM 12.1 billion), reflecting to som e
extent the increase of 174,002 or 3.6% in the num ber
of depositors to five m illion. LTH has announced a 2005
bonus payout of 4.5% to the depositors (2004: 4.3% ).
Total investm ents increased by 9.8% or RM 994 m illion to
RM 11.1 billion as at end-2005 (end-2004: RM 10.2 billion),
to rem ain as the largest asset com ponent of 76.2% of
total assets. The increase w as due m ainly to the sustained
grow th of 25.2% in share investm ents, w hich am ounted
to RM 6.8 billion as at end-2005. As a proportion to total
investm ents, share investm ents continued to account for
the largest share of 61% (2004: 53.5% ). The other m ain
investm ent com ponents w ere investm ent in subsidiaries in
the form of financing and placem ent of deposits w ith
financial institutions, each accounted for 14.4% of total
investm ents during the year.
Sabah Development Bank Berhad
Lending activities of Sabah D evelopm ent Bank Berhad
(SD B) increased further, w ith loans outstanding
grow ing by 13% to RM 1.6 billion as at end-2005 (end-
2004: RM 1.5 billion) to account for 73.9% of total
assets. The increase w as m ainly attributed to strong
grow th in loans extended to the construction and
m anufacturing sectors. In term s of com position, 36%
of total loans outstanding w as extended for real estate
financing, w hile 10.4% and 9.7% w ere to the
construction and m anufacturing sectors, respectively.
D uring the year, total loans approved and disbursed
rose further to RM 606.9 m illion and RM 496.5 m illion
respectively (2004: RM 381.5 m illion and RM 314.3
m illion respectively).
W hile gross N PLs increased to RM 525.5 m illion (2004:
RM 517.5 m illion), the gross N PL ratio declined to 32.1%
Graph 7.9
Credit Guarantee Corporation Malaysia Berhad:
Guarantee by Sector as at 31 December 2005
G eneral business
75%
A griculture
1.2%
M anufacturing
23.7%
O thers
0.1%
Graph 7.10
Lembaga Tabung Haji:
Investments as at 31 December 2005
O ther investm ent
1.7%
D eposits placed
14.4%
Shares
61%
G overnm ent debt
securities
0.1%
Private corporate
debt securities
8.4%
Investm ent in
subsidiary and
associates
14.4%
RM 500,000 (24.4% ). During the year, loans extended to
SM Es involved in the general business sector received three
quarters of CG Cs total guarantee coverage, w hile 23.7%
of the guarantee coverage w as for loans extended to the
m anufacturing sector. In 2005, total claim s paid by CG C
to the banking institutions increased by 19.1% to
RM 147.3 m illion (2004: RM 123.7 m illion).
C G C continued to rely on its shareholdersfunds
(RM 2.2 billion) and borrow ings from the G overnm ent
and its shareholder (RM 1.9 billion), w hich together
accounted for 88.3% of the total sources of funds to
support its guarantee issuance and lending activities.
In line w ith the G overnm ents focus to prom ote the
developm ent of SM Es, Bank N egara M alaysia, as the
largest shareholder of C G C , initiated efforts to
enhance the capacity and capability of C G C to enable
the institution to better serve the needs of SM Es.
Tow ards this end, the scope of activities of C G C has
been w idened to not only providing credit guaratee
facilities, but also to offer a broader range of
products and services, including equity financing and
other ancillary supports such as business developm ent
and financial advisory services, as w ell as credit
inform ation services. To m eet its new expanded role,
the Board of C G C has been broadened to include
m em bers w ith experience in business and finance,
w hile efforts are being taken to strengthen the
resources of C G C .
Lembaga Tabung Haji
The perform ance of Lem baga Tabung H aji (LTH ) or
Pilgrim s Fund Board rem ained favourable in 2005, as
deposit m obilisation and investm ent activities continued
to expand further. Total deposits m obilised by LTH rose
by 10.2% or RM 1.2 billion to RM 13.3 billion as at end-
C07 Dev. Financial pg174-188 3/14/06, 9:16 PM 185
186
(2004: 35.7% ), as a result of a larger loan base. A
m ajor share of the N PLs (72.3% ) w ere loans extended
to the m anufacturing and real estate sectors. O n a net
basis, the net N PL ratio w as at 3.2% (2004:1.5% ).
Borrow ings from financial institutions as w ell as deposits
from the G overnm ent and G overnm ent-controlled
business enterprises continued to be the m ain sources
of funds for SD B. Together these contributed to RM 1.2
billion or 53.4% of the total resources (2004: RM 1.1
billion or 56.2% ).
Sabah Credit Corporation
Lending activities of Sabah C redit C orporation (SC C )
expanded by 5% in 2005 (2004: 9.1% ), w ith loans
outstanding increasing to RM 725.1 m illion as at end-
2005 (end-2004: RM 690.3 m illion) to account for 93.2%
of total assets. D uring the year, total loans approved and
disbursed increased further, am ounting to RM 235.8
m illion and RM 235.4 m illion respectively (2004: RM 209.7
m illion and RM 209.2 m illion respectively).
O utstanding loans for consum ption credit grew by
15.3% in 2005 (2004: 28.3% ), to account for 51.7% of
SC C s total loan portfolio. O f this, the bulk w as
extended as executive loans/personal loans (76.6% ),
w hile the rem aining w as for hire purchase financing.
M eanw hile, the outstanding housing loans, w hich
accounted for 37.6% of the total loan portfolio
rem ained unchanged.
G ross N PLs increased to RM 116.8 m illion w ith a higher
ratio of 16.1% in 2005 (2004: RM 92.6 m illion and
13.4% ), attributed m ainly to the non-perform ing
housing loans. O n a net basis, the N PL ratio w as at
12.1% (2004: 5.2% ). D uring the year, SC C continued
to source its funding through borrow ings from the State
G overnm ent (RM 343.8 m illion) and banking institutions
(RM 265 m illion) to support its activities. These fundings
accounted for a com bined share of 78.2% of its total
sources of funds.
Borneo Development Corporation (Sabah)
Sendirian Berhad
In 2005, property developm ent activities of Borneo
D evelopm ent C orporation (Sabah) Sendirian Berhad
(BD C Sabah) rem ained slow , as reflected in the
decline of property developm ent expenditure and
progress billings w hich am ounted to RM 15.9 m illion
as at end-2005 (end-2004: RM 32.4 m illion).
M eanw hile, end-financing for the purchase of houses
developed by BD C Sabah declined further, as
repaym ent of housing loans continued to offset new
lending activity. D uring the year, the bulk of N PLs
consisting of loans to business enterprises for the
purchase of non-residential properties w as w ritten
off. A s a result, gross N PLs declined significantly to
RM 0.5 m illion and accounted for 8.3% of total loans
as at end-2005 (end-2004: RM 2.8 m illion or 31.6% ).
W ith loan repaym ents by individual borrow ers and
w riting-off of non-perform ing com m ercial property
loans, total loans outstanding declined to RM 5.7
m illion as at end-2005 (end-2004: RM 9 m illion).
A s a result, the total assets of BD C Sabah declined by
16.9% to RM 96.1 m illion as at end-2005 (end-2004:
RM 115.7 m illion). In term s of sources of funds, BD C
Sabah continued to rely on borrow ings from financial
institutions w hich am ounted to RM 37.8 m illion (2004:
RM 59 m illion) or 39.3% of total resources to support
its activities.
Graph 7.11
Sabah Development Bank Berhad:
Direction of Lending as at 31 December 2005
O thers
30.6%
A griculture, forestry
& fishery
6.6%
Real estate
36.0%
C onstruction
10.4%
Business services
6.7%
M anufacturing
9.7%
Graph 7.12
Sabah Credit Corporation:
Direction of Lending as at 31 December 2005
O thers
2.7%
Industrial developm ent
7.0%
H ire purchase
12.1%
Executive loans
39.6%
H ousing
37.6%
A griculture
1.0%
C07 Dev. Financial pg174-188 3/14/06, 9:16 PM 186
187
Development Financial Institutions
Borneo Development Corporation (Sarawak)
Sendirian Berhad
Property developm ent and construction activities
undertaken by Borneo D evelopm ent C orporation
(Saraw ak) Sendirian Berhad (BD C Saraw ak) expanded
further in 2005. Stocks and w ork-in-progress recorded
strong increase of 22.7% (2004: 20.1% ) to RM 80.9
m illion as at end-2005, to account for the largest share
(69.8% ) of BD C Saraw aks total assets.
End-financing activities of BDC Saraw ak, how ever, have
been on a declining trend for the past decade, as property
buyers increasingly turned to the m ore com petitive
financing packages offered by the banking institutions. In
2005, lending by BDC Saraw ak declined further w ith loans
outstanding am ounting to RM 0.7 m illion as at end-2005
(end-2004: RM 0.9 m illion), w hich com prised m ainly loans
extended to its staff (96.7% ) for the purchase of residential
properties. M eanw hile, total investm ents in subsidiary and
associate com panies totalling RM 5.9 m illion, or 5.1% of
total assets, recorded a decline of 12.5% in 2005.
D eposits accepted from house buyers (RM 61.4 m illion)
have becom e the m ain source of funds for BD C
Saraw ak during the year, accounting for 52.9% of total
resources (2004: 36.9% ). The institution also continued
to rely on shareholdersfunds (RM 37.2 m illion) and
borrow ings from financial institutions (RM 6.9 m illion),
w hich together represented 38.1% of total resources
(2004: 51.8% ), to support its operations.
C07 Dev. Financial pg174-188 3/14/06, 9:16 PM 187
C07 Dev. Financial pg174-188 3/14/06, 9:16 PM 189
Other Financial
Institutions
D iscount H ouses
Provident and Pension Funds
Venture C apital
U nit Trust Industry
190
190-191
191-193
193-195
190
Other Financial Institutions
Discount Houses
A s part of the fram ew ork for the creation of investm ent
banks, the seven discount houses currently in operation
w ill be rationalised and m erged w ith stockbroking
com panies and universal brokers to form investm ent
banks. A rising from the rationalisation process, low er
sources and uses of funds w ere recorded in 2005. Total
resources m obilised by the discount houses declined by
RM 5.9 billion or 18.5% (2004: +RM 1.7 billion or 5.6% ).
This w as m ainly due to low er deposits, w hich declined
for the first tim e since 1999, by RM 6.2 billion or 22%
on an annual basis (2004: +RM 4.3 billion or 18.3% ).
C orrespondingly, in term s of uses of funds, interbank
placem ents declined significantly by RM 5.3 billion to
RM 6.7 billion (2004: +RM 6.2 billion to RM 12 billion).
Investm ents in securities w ere m arginally low er during
the year, declining by RM 0.5 billion or 2.9% (2004: -
RM 4.1 billion or -17.8% ). There w as a notable shift in the
types of investm ent undertaken by discount houses, w ith
a m arked reduction in the holdings of bankers
acceptances (BA s) and private debt securities (PD S). The
low er holdings of BA s w ere attributable to the low er
yields on these instrum ents. The low er holdings of PD S
w ere, to som e extent, the result of an adjustm ent in
investm ent portfolios of the discount houses, as part of
the rationalisation process. C onversely, the discount
houses increased their holdings of G overnm ent debt
securities, by RM 1.1 billion or 63.2% on an annual basis
(2004: +RM 0.5 billion or 35.7% ), particularly in the form
of M alaysian G overnm ent Securities (M G S), and to a
lesser extent, G overnm ent Investm ent Issues (G II) and
Treasury Bills (TBs). In addition, investm ents in BN M bills
and Khazanah bonds w ere higher in 2005. A s part of the
portfolio reallocation exercise, the discount houses also
increased their holdings of N egotiable Instrum ents of
D eposits (N ID s), by RM 1 billion to RM 1.6 billion (2004: -
RM 0.3 billion to RM 0.6 billion).
D uring the year, fee-based activities of the discount
houses rem ained relatively stable. The industry arranged,
lead-m anaged and co-m anaged the issuances of PD S
w orth RM 3.4 billion (2004: RM 3.6 billion), w hile the total
am ount underw ritten m oderated to RM 0.8 billion (2004:
RM 1.5 billion) for 31 PD S issues (2004: 32 issuances).
Provident & Pension Funds
Total resources of the provident and pension funds
(PPFs) surveyed by Bank N egara M alaysia expanded by
10% to RM 320.6 billion in 2005. The Em ployees
Provident Fund (EPF) rem ained the largest fund,
accounting for 82.3% of the total funds of the PPFs.
A ccum ulated contributions, w hich accounted for
89.9% of the total resources of the PPFs, grew by
10% as at end-2005 (2004: 9% ). The increm ent,
Table 8.1
Discount Houses: Sources and Uses of Funds
A nnual change

A t
end-
2004 2005
2005
RM m illion
Sources:
A pproved capital funds 264 -298 2,339
D eposits 4,344 -6,191 21,903
Interbank borrow ings -2,944 526 1,141
O thers 38 48 593
Total 1,702 -5,916 25,976
U ses:
Investm ent in securities: -4,146 -555 18,554
Government debt securities 475 1,140 2,943
MGS held 572 686 2,093
Khazanah bonds -173 251 575
BNM bills -365 516 516
Private debt securities -3,033 -1,527 9,370
Bankers acceptances 822 -1,908 2,151
Negotiable instruments of
deposit -289 996 1,555
Cagamas debt securities -1,093 33 1,109
Others -491 -56 335
Interbank placem ents 6,230 -5,316 6,723
O thers -382 -45 699
2003 2004 2005
N um ber of discount houses 7 7 7
N ote: Total m ay not add up due to rounding.
Table 8.2
Provident and Pension Funds: Selected Indicators
2004 2005p
RM m illion
As at end
N um ber of contributors (000) 21,162 21,901
of which: EPF 10,716 11,055
: SOCSO 10,239 10,627
A ccum ulated contributions 262,039 288,203
A ssets 291,493 320,645
of which: Investments in MGS 100,318 110,947
During the year
N et new contributions 12,423 14,531
Gross contributions 26,226 28,313
Withdrawals 13,803 13,783
D ividends credited 10,705 12,993
Investm ent incom e 13,458 15,561
p Preliminary
Source: Em ployees Provident Fund, Pension Trust Fund, Social Security
O rganisation, A rm ed Forces Fund, M alaysian Estates Staff Provident
Fund, Teachers Provident Fund and three other private provident and
pension funds.
C08 Financial Inst. pg190-196 3/14/06, 9:16 PM 190
191
Other Financial Institutions
w hich is the largest since 2000, w as m ainly due to
the significant increase of 17% in net new
contributions (2004: 3.4% ) and 21.4% in dividends
credited (2004: 14.8% ). Slightly low er w ithdraw als
w ere recorded for the year, com pared w ith 2004.
The significant increase of 17% in net new
contributions to the PPFs cam e largely from higher
gross contributions. D uring the year, gross
contributions increased by 8% (2004: 8.2% ),
reflecting sustained grow th in w ages and the num ber
of contributors to the funds. In addition, total
w ithdraw als from the PPFs declined m arginally by
0.1% in 2005 (2004: +12.8% ). N onetheless,
w ithdraw als from the EPF for investm ent purposes
increased by 15.5% , w hich corresponded w ith higher
sales of unit trust funds during the year.
G iven the higher investm ent incom e in 2005, the EPF
w as able to declare a higher dividend rate of 5% to
its contributors (2004: 4.75% ), w hich w as the highest
since 2002. G ross incom e from investm ent increased
by 11.5% to RM 13.1 billion, given the higher returns
from investm ent in private debt securities (PD S) and
lending activity. Returns from investm ent in debt and
equity instrum ents by the EPF contributed 56.1% of
its total investm ent incom e in 2005. N otw ithstanding
the lacklustre perform ance of Bursa M alaysia in 2005,
incom e from equity investm ent registered a healthy
grow th of 12.8% .
In term s of asset com position of the PPFs, allocation w as
skew ed tow ards investm ents w hich offered higher
returns. G iven the relatively low interest rate
environm ent, holdings of cash and near-cash interest-
bearing and interest-dependent assets like deposits in
banking system and m oney m arket instrum ents, w ere
reduced. In addition, the holdings of equity-based
investm ents experienced a m arginal decline to 22.3%
(2004: 23.2% ). N evertheless, the share of PD S and
loans increased further to 14.9% and 17.4%
respectively. In 2005, PD S issuance grew significantly
and this developm ent led to higher investm ent in PD S
by PPFs.
Venture Capital
In 2005, the venture capital (VC ) industry in M alaysia
has progressed significantly as an alternative source of
financing to the econom y, w ith increased total funds
available for disbursem ent and higher level of
participation from industry players. Total investm ents
from both local and foreign sources, num ber of venture
capital fund m anagem ent com panies and num ber of
investee com panies also grew throughout the year. Total
available funds for VC investm ents increased by 14.3% to
RM 2.6 billion. Both investm ent from dom estic sources
and investm ent from foreign sources recorded a
significant grow th of 32.8% and 54% , respectively. By
the end of 2005, the total num ber of investee com panies
had increased further to 380 com panies, involving a total
investm ent of RM 1.4 billion. Funds invested during the
year increased by 49.2% to RM 431.5 m illion into 101
investee com panies (2004: increased by 27.3% to
RM 289.3 m illion into 139 investee com panies).
The C radle Investm ent Program (C IP), w hich w as
adm inistered and m anaged by the M alaysia Venture
C apital M anagem ent Berhad (M AVC A P), continued to
provide pre-seed funding and entrepreneurial support
to aspiring entrepreneurs w ith the com m itm ent to
develop and com m ercialise their ideas. A s at end-
2005, the am ount of grants approved w as RM 7.5
Graph 8.1
Provident and Pension Funds:
Major Asset Composition
% of total assets RM billion
M G S
Equity
Total assets (RH S)
Loans
D eposits &
m oney m arket
Private debt securities
O thers
31.9 31.3
34.4 34.4 34.6
10.7 12.2
14.8 16.0 17.4
11.4 11.5
12.5
13.5
14.9
25.4
26.2
25.2 23.2
22.3
18.0 16.0
10.7 10.3 7.9
0
20
40
60
80
100
50
100
150
200
250
300
350
2001 2002 2003 2004 2005
Table 8.3
Key Statistics of Venture Capital Industry
As at end- As at end-
2004 2005
Venture capital funds (RM m illion) 2,266.0 2,589.0
Total investm ent (RM m illion) 1,058.0 1,441.5
Local sources (RM m illion) 887.7 1,179.3
Foreign sources (RM m illion) 170.3 262.2
N o. of venture capital com panies / funds 38 48
N o. of venture capital fund m anagem ent
com panies 34 39
N o. of investee com panies 332 380
During During
2004 2005
Total investm ent (RM m illion) 289.3 431.5
Local sources (RM m illion) 248.4 338.2
Foreign sources (RM m illion) 40.9 93.3
N o. of investee com panies 139 101
1
Including divestm ent activities
Source: Securities C om m ission
C08 Financial Inst. pg190-196 3/14/06, 9:16 PM 191
192
m illion and w as aw arded to m ore than 150 recipients.
A s C IP investm ent w as m ainly focussed on technology
innovations, m ost of the ideas funded w ere related to
this sector, such as softw are developm ent, consum er/
business products and e-services. C IPs strategy of
partnerships w ith aligned and non-aligned industry
partners, w hich included the various technology and
investing com m unity partners, allow ed the program to
grow as a new source of deal flow for venture capital
and private equity firm s, as w ell as other com panies.
Execution via the C radles Ideas Bank has strengthened
netw orking betw een C IPs grant recipients w ith the
investing com m unity and the m edia. This w as
especially im portant to provide publicity and aw areness
of success stories w hich has led to m ore exposure for
C IPs partners.
M AVCAP, as one of the few VC com panies to provide seed
and early-stage financing, continued to finance com panies
w hile m aintaining the investm ent focus on ICT as
m andated by the G overnm ent. For the year 2005, 17 new
investees w ere provided funding by M AVCAP. M ost of the
investees funded by M AVCAP w ere deals related to the life
sciences, biotechnology, agriculture and renew able energy.
In line w ith the G overnm ents efforts to allow the private
sector to spearhead grow th, the contribution of funds for
VC investm ents from dom estic private sector entities
recorded another significant increase of 20% in 2005 (2004:
35.1% ). In 2005, funds from foreign sources recorded the
highest grow th, follow ed by funds from banks and other
private sector entities. As at end-2005, the G overnm ent
rem ained as the largest contributor for VC funds.
Graph 8.2
Sources of Venture Capital
(% share, as at end-2005)
G overnm ent
37.8%
Total: RM2,589 million
Insurance
com panies
1.8%
Private individuals
5.6%
Banks
14.3%
O ther private
sector entities
32.1%
Foreign entities
7.4%
Provident and
pension funds
1.8%
Table 8.4
Investment by Stages during 2005
No. of Investee Companies 101
Business Stage RM 000 % share
Seed capital 11,643.1 2.7
Start-up capital 25,116.0 5.8
Early stage 107,276.3 24.9
Expansion, grow th 61,569.0 14.3
Bridge, m ezzanine, pre-IPO 162,204.8 37.6
M anagem ent buy-out 29,664.0 6.9
M anagem ent buy-in 14,700.0 3.4
C ashing-out (secondary purchase) 1,642.0 0.4
O ther types of investm ent 17,748.0 4.1
Total 431,563.2 100.0
Source: Securities C om m ission
A s at end-2002
A s at end-2003
A s at end-2004
A s at end-2005
O ther types of investm ent
C ashing-out (secondary purchase)
M anagem ent buy-out
M anagem ent buy-in
Bridge, m ezzanine, pre-IPO
Expansion, grow th
Early stage
Start-up capital
Seed capital
Graph 8.3
Outstanding Investment by Stages (% share)
Source: Securities C om m ission
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
C08 Financial Inst. pg190-196 3/14/06, 9:16 PM 192
193
Other Financial Institutions
In term s of stages, VC investm ents, during the year,
continued to focus on the expansion/grow th, bridge/
m ezzanine/pre-IPO and the early stages. These
investm ents represented m ore than 75% of all VC
investm ents in 2005. In term s of share, investm ents in the
m ore risky stages, nam ely the seed capital and the start-
up capital stages, declined from 12.3% in 2004 to 8.5%
in 2005. Investm ents in other stages increased slightly.
In term s of outstanding investm ents by stages, the
expansion/grow th, bridge/m ezzanine/pre-IPO and start-
up capital stages w ere still the m ain business stages that
received the bulk of VC investm ents since 2003.
A s in the previous year, in term s of investm ents by
sector, the inform ation and com m unication
technology (IC T), life sciences and m anufacturing
sectors continued to receive the m ost of the
financing. In total, the am ount of VC investm ent in
these three sectors constituted 85.7% of total
investm ent m ade in 2005 (2004: 77.3% of total
investm ent m ade). In term s of the outstanding size
of funding at end-2005, the sectors w hich received
m ost of the VC investm ent w ere the IC T sector
(49.4% of total), the life sciences sector (21.1% ) and
the m anufacturing sector (15.2% ). The three sectors
com bined, accounted for RM 1.2 billion or 85% of
total funds invested. D uring the year, dom estic VC
funds w ere concentrated in the IC T (53.6% ),
m anufacturing (17% ) and life sciences (11.1% )
sectors, w hile foreign VC funds m ainly invested into
the life sciences (57.4% ), IC T (34.1% ) and
m anufacturing (8.5% ) sectors. The apparent shift in
investm ent preferences as experienced in 2004
continued in 2005. The bulk of the dom estically-
sourced VC investm ent w as m ore focussed on the IC T
sector, a m ove aw ay from the previous focus on the
m anufacturing sector, w hile foreign VC funds
continued to concentrate on the life sciences sector.
G row th of the VC industry has advanced significantly
to support sustainable funding for new grow th areas
as w ell as to serve as an alternative source of
financing to the econom y. N evertheless, w hile m any
initiatives w ere undertaken to develop this form of
alternative financing, areas for further im provem ent
are still prevalent. The VC industry developm ent
needs to diversify further in m eeting financing needs
of potential investees in the seed stages.
Unit Trust Industry
The unit trust industry expanded further in 2005,
w ith m ore new funds launched and further increases
in the num ber of units in circulation. The net asset
value (N AV) of the industry continued to expand by
12.7% and accounted for 14.2% of the total equity
m arket capitalisation as at end-2005 (end-2004:
12.1% ). D uring the year, a total of 51 new unit trust
funds w ere launched (62 in 2004), bringing the total
num ber of funds to 332 as at end-2005 (end-2004:
281). The sustained increase in the num ber of unit
trusts launched reflected continued confidence in unit
trusts as an investm ent vehicle to access a w ell-
diversified portfolio. G ross sales of units rem ained
consistently high throughout the year w ith an
increase of 25.3% (33.4% in 2004). D espite the
relatively higher repurchases m ade during the year, the
industry recorded resilient annual net sales of RM 14.9
Inform ation and
com m unication
technology
49.4%
Life sciences
21.1%
O thers
6.5%
M anufacturing
15.2%
Education
4.1%
Electricity, pow er
generation, gas
and w ater
0.1%
Transport,
storage and
com m unication
3.7%
Graph 8.4
Investment made in 2005 (% share of total)
Table 8.5
Outstanding VC Investment by Sectors
A s at end-2005
RM 000 % share
Inform ation and com m unication
technology 661,189.2 45.9
M anufacturing 292,906.2 20.3
Life sciences 270,574.1 18.8
Education 59,325.0 4.1
Electricity, pow er generation, gas
and w ater 4,740.0 0.3
W holesale, retail trade, restaurant
and hotels 12,024.0 0.8
Financing, insurance, real estate
and business services 15,963.2 1.1
C onstruction 100.0 0.0
Transport, storage and com m unication 15,970.0 1.1
O thers 108,748.4 7.5
Total 1,441,540.2 100.0
Source: Securities C om m ission
C08 Financial Inst. pg190-196 3/14/06, 9:16 PM 193
194
billion or 18.2% higher than the year before (RM 12.6
billion or 81.9% in 2004).
Effective 1 A pril 2005, the threshold for investing in
funds abroad by unit trust com panies w as increased
from 10% to 30% of the total N AV of all resident
funds m anaged by a unit trust com pany. A s a result,
m ore global funds w ere established in 2005. O ut of 51
new unit trust funds launched during the year, 13 of
these funds w ere global funds m eant for investm ent in
foreign securities, either directly or via alliances w ith
foreign unit trust funds.
Graph 8.6
Unit Trust Industry - Gross Sales, Repurchases
and Net Sales
RM m illion
0
2000
4000
6000
8000
10000
12000
14000
16000
G ross sales
2002 2003 2004 2005
Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4
Repurchases N et sales
Graph 8.7
Islamic Unit Trusts - NAV, Units in Circulation,
and Number of Funds
N et asset value
U nits in circulation
0
2
4
6
8
10
12
14
16
18
20
2001 2002 2003 2004 2005
0
10
20
30
40
50
60
70
80
90
N um ber of funds
N et asset value (RM bil)
N o. of units in circulation (bil)
N um ber of funds
O ngoing efforts to further stim ulate the developm ent of
the Islam ic unit trust industry brought about continued
positive grow th in term s of N AV for the industry. In
2005, a total of 12 new Islam ic funds w ere launched
(15 in 2004), bringing the total num ber of Islam ic funds
to 77. The N AV of Islam ic funds, w hich grew by 25.5% ,
accounted for 8.6% of total N AV of the unit trust
industry as at end-2005 (end-2004: 7.7% ).
The G overnm ent undertook further m easures to
accelerate the developm ent of a vibrant and
com petitive Real Estate Investm ent Trusts (REITs)
industry in M alaysia. The G uidelines on REITs w ere
revised by the Securities C om m ission (SC ), w ith the
objective of attracting new players and enhancing
aw areness am ongst local industry players and property
ow ners/developers on the benefits of establishing a
REIT. A s at end-2005, three REITs w ere successfully
listed on the M ain Board of Bursa M alaysia, bringing
the total num ber of listed REITs to six, w hile one REIT
rem ained unlisted. A cceptance of REITs as an
additional instrum ent for investors has been favourable
thus far. Total turnover for REITs listed on Bursa
M alaysia increased significantly to RM 341.6 m illion for
the year (RM 11.8 m illion in 2004).
To further develop the M alaysian unit trust industry,
the G overnm ent continued to seek w ays to create an
enabling environm ent in the country to m axim ise the
potential for unit trusts. The SC continued to release
guidelines for new products and revised rules for
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Graph 8.5
Unit Trust Industry - NAV, Units in Circulation
and Number of Funds
N et asset value,
N o. of units in circulation
N um ber of funds
0
20
40
60
80
100
120
140
0
50
100
150
200
250
300
160 350
N et asset value (RM bil)
N o. of units in circulation (bil)
N um ber of funds
C08 Financial Inst. pg190-196 3/14/06, 9:16 PM 194
195
Other Financial Institutions
feeder funds, fund-of-funds and w holesale funds to
encourage w ider participation by both high net w orth
individuals retail and institutional investors. Several
investm ent restrictions w ere lifted to allow greater
flexibility for unit trust fund m anagers to invest in a
variety of instrum ents that w ould provide investors
w ith a w ider spectrum of risk-return m andates.
The penetration level, as m easured by the ratio of net
asset value of the unit trust industry to equity m arket
capitalisation, im proved to 14% from 12% in 2004.
W hile this ratio rem ained low relative to countries w ith
m ore m ature financial system s, it indicated an
opportunity for the unit trust industry to progress as an
im portant investm ent vehicle for M alaysian investors.
C08 Financial Inst. pg190-196 3/14/06, 9:16 PM 195
C08 Financial Inst. pg190-196 3/14/06, 9:16 PM 197
Financial Markets
O verview
M oney M arket
Foreign Exchange M arket
Equity M arket
White Box:Key Capital Market Measures in 2005
Bond M arket
Exchange-traded D erivatives M arket
198-199
199-201
201-202
202-204
205-207
208-212
212-214
198
Overview
The operating environm ent in the financial m arkets w as
influenced by episodes of larger capital flow s, upw ard
pressures on oil prices and inflation against the
backdrop of am ple liquidity situation and a higher
degree of risk appetite. The relatively low yields in the
bond m arket provided a favourable condition for
financing activity by the corporate sector. Volatility in
the exchange rates of the m ajor currencies, the floating
of the ringgit w ith reference to a basket of currencies
and expectations of interest rate hikes led to increased
hedging activity in the foreign exchange and financial
futures m arkets.
Financial Markets
stepped up issuances of PD S to capitalise on the
flattening yield curves at the longer-end and the low
real yields in an environm ent of excess liquidity am idst
dem and for long-term securities. Total net PD S
issuance am ounting to RM 19.6 billion w as the highest
recorded since 2000. A s at end-2005, PD S financing
accounted for 24% of total debt financing to the
private sector, com plem enting the banking system in
providing long-term financing to the corporate sector.
M eanw hile, total funds raised in the equity m arket
w ere only slightly low er despite the less encouraging
m arket perform ance during the year. A total of 79
com panies sought listing in Bursa M alaysia and m ore
than half (46 com panies) of these listings w ere sm all to
m edium capitalised com panies w hich w ere listed on
the M ESD A Q M arket. The M ESD A Q M arket rem ained
an im portant alternative avenue for these com panies
to raise equity financing.
Funds raised by the public sector declined by 40.6%
due m ainly to the low er issuance of governm ent
securities as the G overnm ent continued on its fiscal
consolidation phase. The G overnm ent m ade an
inaugural issuance of a 20-year M alaysian G overnm ent
Favourable conditions in the
financial markets contributed
to active fund raising exercises
by the private sector.
In 2005, net funds raised in the capital m arket totalled
at RM 41.7 billion, albeit m arginally low er than the
am ount raised in the previous year (2004: RM 42.7
billion). The sustained large volum e of funds raised in
2005 reaffirm ed the vital role played by the capital
m arket in m obilising and allocating funds on the basis
of m arket-based com petitive financing. O f significance,
net funds raised by the private sector accounted for a
larger share of 62.1% of total funds raised (2004:
37.5% ), attributed to the higher financing needs on the
back of the strengthening of private sector activity
during the year.
The private debt securities (PD S) m arket experienced
active fund raising activity during the year. C orporations
Graph 9.1
Net Funds Raised in the Capital Market by the
Public and the Private Sectors
RM billion
2001 2002 2003 2004 2005
Public Sector Private Sector
0
10
20
30
40
50
60
Table 9.1
Funds Raised in the Capital Market
2004 2005p
RM m illion
By Public Sector
G overnm ent Securities (gross) 43,173 28,276
Less Redem ptions 18,200 15,800
Less G overnm ent holdings 0 0
Equals N et Federal receipts 24,973 12,476
Khazanah Bonds (net) -1,198 833
G overnm ent Investm ent Issues (net) 1,423 1,000
M alaysia Savings Bond/M erdeka
Savings Bond (net) 1,474 1,516
Net Funds Raised by Public Sector 26,671 15,825
By Private Sector
Shares 6,475 6,315
D ebt securities
Issuance (gross) 36,340 38,196
Less Redem ptions 26,814 18,617
Equals N et Issues 9,526 19,579
Net Funds Raised by Private Sector 16,001 25,894
Total Net Funds Raised 42,672 41,719
Short-term papers and notes (net)
1
-3,208 1,579
Total 39,465 43,297
1
Refers to C om m ercial Papers and C agam as N otes.
p Prelim inary
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 198
199
Financial Markets
Securities (M G S) and a 7-year G overnm ent Investm ent
Issues, w ith the purpose of lengthening the benchm ark
yield curve for the conventional and Islam ic debt
m arkets.
The Kuala Lum pur interbank foreign exchange m arket
recorded a significant rise in both spot and sw ap
transactions on the back of increased hedging activity
for trade and investm ent purposes, follow ing the large
volatility in the exchange rates of the m ajor currencies.
In addition, sizeable m ovem ents of short-term
speculative flow s and the depegging of the ringgit also
contributed to higher m arket activity.
A ctivity in the m oney m arket w as m arginally low er.
The sm aller volum e of interbank deposits offset the
m odest grow th recorded in the m oney m arket papers.
Trading in m oney m arket papers centred on the M G S,
w ith significant increases in the repo transactions
follow ing the introduction of Institutional Securities
C ustodian Program m e (ISC A P) and the introduction of
a securities lending facility for principal dealers by the
Bank to im prove the repo m arket.
O n Bursa M alaysia D erivatives, although trading
activity w as concentrated on C rude Palm O il (C PO )
futures and KLC I futures (92.3% of total trade), the
interest rates-related 3-m onth KLIBO R Futures and the
3-year M G S Futures recorded higher volum e. O pen
interests of these financial futures rose in the fourth
quarter, reflecting the increased participation by
financial institutions in taking hedging positions
against anticipated interest rate hikes. M eanw hile,
trading activity of C PO futures declined due m ainly to
the reduced volatility in C PO prices.
O n the developm ental front, the Bank and the relevant
authorities took further m easures to enhance the
infrastructure and the efficiency of the financial
m arkets. Specific m easures w ere also im plem ented to
develop the Islam ic financial m arkets. M easures
introduced, am ong others, w ere aim ed at prom oting
liquidity in the bond m arket, liberalising rules on
foreign exchange transactions, broadening risk
m anagem ent tools, facilitating the introduction of new
products and enhancing the inform ation dissem ination
system . D etails are contained in the box Key Capital
Market Measures in 2005.
Money Market
A ctivity in the m oney m arket w as m arginally low er in
2005. The trading volum e of interbank deposits w as
sm aller com pared to 2004, w hile the trading volum e in
m oney m arket papers recorded a m odest grow th.
Table 9.2
Money Market
1
2004 2005
Volum e A nnual Volum e A nnual
(RM change (RM change
billion) (% ) billion) (% )
Total money market
transactions 1,665.9 3.0 1,622.0 -2.6
Interbank deposits 1,057.5 -2.5 887.6 -16.1
Money market papers 608.4 14.3 734.5 20.7
Repurchase A greem ents 118.6 170.8 264.4 122.9
M alaysian G overnm ent
Securities (M G S) 193.3 -16.5 179.4 -7.2
M alaysian Treasury Bills 17.1 72.1 12.9 -24.6
Bank N egara Bills 74.1 18.5 72.8 -1.8
C agam as Bonds 38.6 50.7 16.3 -57.9
C agam as N otes 4.4 -72.8 0.0 -100.0
Bankers
A cceptance (BA s) 48.0 28.6 44.2 -8.0
N egotiable Instrum ent of
D eposits (N ID s) 36.3 -15.8 39.0 7.5
G overnm ent Investm ent
Issues 35.9 4.0 43.2 20.5
Khazanah Bonds 17.6 -6.3 20.0 13.6
M alaysian Islam ic
Treasury Bills 1.2 n.a. 4.5 265.6
Islam ic C agam as Bonds 2.1 2,397.6 1.8 -14.1
Bank N egara N egotiable
N otes 21.2 137.6 36.1 70.5
1
A ll data are sourced from the Fully A utom ated System for Issuing/Tendering
(FA ST), except for BA s and N ID s w hich are sourced from m oney m arket
brokers.
0.4
8.8
0.2
2005 2004
7.2
69.1
18.9
4.3
68.3
18.5
4.2
O vernight
W eekend
1-w eek
1 to 3-m onth
6, 12m , O thers
0
10
20
30
40
50
60
70
80
90
100
Graph 9.2
Interbank Deposits
%
Share of Total Volume Traded
A t RM 887.6 billion, the volum e of interbank deposit
transactions w as low er in 2005 (2004: RM 1,057.5
billion). The bulk of trading continued to be
concentrated in the shorter-end of the m arket w ith the
overnight and w eekend tenures continued to be actively
used for settlem ent and liquidity purposes. The low er
interbank deposit transactions reflected, to som e extent,
the slight reduction in liquidity in the interbank deposit
m arket follow ing the outflow of short-term speculative
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 199
200
foreign funds and also m arket preference to trade in
m oney m arket papers.
In term s of trading in m oney m arket papers, the volum e
of transactions increased to RM 734.5 billion in 2005
(2004: RM 608.4 billion). There w as a significant increase
in repo transactions during the year, as reflected by the
increased activity in the repo m arket for M alaysian
G overnm ent Securities (M G S). The increased utilisation of
repos, follow ing the introduction of ISC A P (Institutional
Securities C ustodian Program m e), and the introduction of
a securities lending facility for principal dealers in 2005,
had a significant im pact on the trading volum e of M G S in
the repo m arket. The introduction of ISC A P facilitated the
release of captive holdings of M G S by institutional
investors, w hile the securities lending facility created
m ore m arket-m aking activity, including the use of the
repo m arket to cover short selling positions.
O verall trading volum e in the outright purchase and sale
of instrum ents w as low er com pared to 2004, m ainly on
account of the low er outright transactions of M G S,
am ounting to RM 179.4 billion in 2005 (2004: RM 193.3
billion). This w as an outcom e of the low er net issuance
of M G S by the G overnm ent during the year, w hich at
RM 12.5 billion, w ere only half as m uch as in the
previous year (RM 25 billion in 2004). In addition,
outright transactions in the M G S m arket w ere also
influenced by expectations on the direction of interest
rates. In the final quarter of the year, dem and w as
affected by uncertainty over the supply of M G S. W hile
non-resident activity in the trading of M G S increased
during the year, their activity had m inim al im pact on the
volum e of transactions and yields of M G S, as dem and
for M G S by dom estic investors rem ained strong. This
w as particularly evident in the fourth quarter, w hen
strong dem and by dom estic investors m itigated M G S
prices from correcting sharply follow ing sales by non-
resident investors.
D uring the year, dem and for long-term Islam ic bonds in
the outright m arket continued to increase. This w as
clearly evident in the higher trading volum e of the
G overnm ent Investm ent Issues (G II) and Khazanah
Bonds, w hich increased to RM 43.2 billion and RM 20.0
billion respectively (2004: RM 35.9 billion and RM 17.6
billion respectively). In 2005, a new profit-based G II,
w ith a m aturity of 10 years, w as introduced as an
additional instrum ent to the existing discount-based G II.
Graph 9.3
Money Market Instruments
0%
20%
40%
60%
80%
100%
2004 2005
BA N ID s M G S
Khazanah M TB BN B
C agam as Bonds Repo C agam as N otes
G II
Islam ic C agam as Papers
19.5
6.3
15.7
31.8
6.0
7.9
5.9
5.9
36.0
2.2
14.8
24.4
5.3
6.0
Share of Total Volume Traded
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
(RM billion)
J
a
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Graph 9.4
Volume of Traded MGS
J
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F
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M
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-
0
5
Graph 9.5
Yields of Long-term Money Market Instruments
%
3-y M G S 3-y G II
O PR 5-y M G S
2.5
3.0
3.5
4.0
4.5
J
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1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
Graph 9.6
Yields on Short-term Money Market
Papers & Deposits
%
1m 6-m M TB
on 6-m BN B
3-m M TB
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 200
201
Financial Markets
The issuance of the profit-based G II w as aim ed at
m eeting the grow ing dem and for Shariah-com pliant
securities.
In term s of C agam as bonds and notes, including
Islam ic C agam as papers, the trading volum e w as low er
at RM 18.1 billion (2004: RM 45.1 billion) due m ainly to
the low er issuances of RM 2.5 billion during the year
(2004: RM 9.3 billion).
Trading in m oney m arket papers w ith m aturities of less
than 1-year w as m ixed. D uring the year, higher deposits
in the banking system spurred the banking institutions
to increase the creation and trading of N ID s. O n the
other hand, the trading volum e of the M alaysian
Treasury Bills w as low er given the sm aller total issuance
and low yields. The trading volum e of Bank N egara Bills
w as only m arginally low er in 2005, am ounting to
RM 72.8 billion (2004: RM 74.1 billion), reflecting the
stronger dem and by non-resident investors.
In contrast, the trading volum e of both Bank N egara
N egotiable N otes (BN N N ) and M alaysian Islam ic
Treasury Bills (M ITB) w ere higher at RM 36.1 billion and
RM 4.5 billion respectively (2004: RM 21.2 billion and
RM 1.2 billion respectively). This developm ent reflected,
to som e extent, the increased supply of these
instrum ents am id grow ing dem and from m oney
m arket players for liquid Shariah-com pliant assets, as
w ell as, from the significant am ount of non-resident
trading activity.
Foreign Exchange Market
In the Kuala Lum pur interbank foreign exchange
m arket, the average daily volum e of interbank foreign
exchange transactions (spot and sw ap) increased by
40% in 2005. Spot transactions rose 45% , w hile
sw aps registered an increase of 36% . The rise in the
volum e of transactions w as due largely to increased
hedging activity for trade and investm ent purposes,
arising from the volatility in the exchange rates of the
m ajor currencies during the year. M arket participants
also sought to actively m anage their exposure to
currency risk, both prior to, and after the m ove from a
fixed exchange rate to a m anaged float of the ringgit
against a basket of currencies. The Kuala Lum pur
foreign exchange m arket also experienced larger
portfolio flow s during the year, w hich contributed to
the higher m arket activity. This increase in volum e w as
m ore significant in the period after the shift in
exchange rate regim e on 21 July 2005. C onsequently,
the volum e of transactions w as higher in the second
half of the year and accounted for 57% of total
transactions during the year.
By com position, the Kuala Lum pur foreign exchange
m arket com prised m ainly of transactions involving the
ringgit, yen, euro, Singapore dollar and pound sterling
against the US dollar. The US dollar continued to be the
currency of choice in the settlem ent of trade and capital
account transactions and thus, the dom ination of
transactions in the US dollar against the ringgit. The share
of US dollar - ringgit transactions in total foreign exchange
transactions increased further, by 66% in 2005 com pared
to 2004. As a result, the share of US dollar - ringgit
transactions continued to trend upw ards, and in 2005
accounted for 93.3% of the total transactions at the Kuala
Lum pur foreign exchange m arket. Follow ing the
0
1,400
1,200
1,000
800
600
400
200
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
RM billion RM billion
Graph 9.7
Volume of Interbank Transactions in the
Kuala Lumpur Foreign Exchange Market
0
1,400
1,200
1,000
800
600
400
200
Spot Sw ap Total
N ote: D ata from 2002 onw ards is based on the new Ringgit O perations
M onitoring System (RO M S), w hereas observations for previous years
are based on transactions of the eight A uthorised D ealers.
Graph 9.8
Transactions in the Kuala Lumpur Foreign
Exchange Market by Currency
2005
(RM 650.1 billion)
U SD /RM
2004
(RM 464.7 billion)
U SD /SG D
U SD /YEN
U SD /EU RO
U SD /STG
O thers
78.5%
2.6%
8.4%
4.2%
6.3%
0.03% 93.3%
1.7%
0.8%
3.6%
0.6%
0.01%
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 201
202
Table 9.4
Bursa Malaysia: Selected Indicators
2004 2005
Price Indices:
C om posite 907.43 899.79
EM A S 214.26 203.85
Second Board 110.87 80.44
M ESD A Q 122.84 87.09
Total Turnover:
Volum e (billion units) 108.0 102.3
Value (RM billion) 216.7 177.1
Average D aily Turnover:
Volum e (m illion units) 435.5 414.3
Value (RM m illion) 873.7 716.9
M arket C apitalisation (RM billion) 722.0 695.3
M arket C apitalisation / G D P (% ) 160.6 140.6
Total N um ber of Listed C om panies: 963 1,021
M ain Board 622 646
Second Board 278 268
M ESD A Q 63 107
M arket Liquidity:
Turnover Value / A verage M arket
C apitalisation (% ) 31.9 25.2
Turnover Volum e / N um ber of Listed
Securities (% ) 36.4 31.4
M arket C oncentration:
*10 M ost H ighly C apitalised Stocks / M arket
C apitalisation (% ) 34.4 36.1
Average Paid-U p C apital of
Stockbroking Firm s (RM m illion) 167.0 152.5
* Based on m arket transactions only.
Source: Bursa M alaysia
Table 9.3
Bursa Malaysia: Performance of Sectoral Indices
2004 2005
A nnual change (% )
Kuala Lum pur C om posite Index 14.3 -0.8
EM A S 9.6 -4.9
Second Board - 21.2 -27.4
M ESD A Q C om posite Index -19.3 -29.1
Plantation 9.4 15.8
Industrial 10.9 3.8
Trading/Services 14.3 -1.7
Finance 15.3 -3.5
C onsum er products 7.3 -5.0
Shariah 8.9 -5.0
Industrial products 4.6 -12.3
M ining 6.7 -12.8
C onstruction - 8.9 -25.9
Properties - 4.5 -26.8
Technology -28.5 -37.8
Source: Bursa M alaysia
unpegging of the ringgit exchange rate, the share of
U S dollar - ringgit transactions in total transactions
rose, from 91.8% over the 1 January 21 July 2005
period to 94.8% over the 22 July 31 D ecem ber
period. C onversely, the share of transactions
involving the other currency pairs decreased. The
share of transactions involving the yen and euro
decreased from 8.4% and 4.2% in 2004 to 3.6% and
1.7% , respectively in 2005. Sim ilarly, there w as a
decrease in transactions involving the Singapore
dollar and pound sterling, from 2.6% and 6.3% of
total transactions in 2004 to 0.8% and 0.6% in
2005, respectively.
Equity Market
Throughout 2005, the equity m arket w as affected by
concerns over the im plications of global developm ents,
prim arily high oil prices, on dom estic inflation and
grow th prospects. The year began on an optim istic
note w ith the benchm ark Kuala Lum pur C om posite
Index (KLC I) hitting a four and a half year high of
930.6 points on 11 January. Thereafter, developm ents
such as continued escalation of oil prices, increasing
global interest rates, and their consequent im pact on
the econom y, adversely affected m arket sentim ents. In
addition, several dom estic corporate developm ents in
particular below m arket expected earnings,
contributed negatively to the perform ance of the KLC I
during the year. N evertheless, Bursa M alaysia rem ained
an im portant avenue for financing as the num ber of
new com panies seeking listing continued to increase.
Graph 9.9
Kuala Lumpur Composite Index (KLCI), Second
Board Index, MESDAQ Market Composite Index
(MCI) and Bursa Malaysia's Trading Volume
Index (Jan 2004=100) Trading volum e (billion units)
KLC I Second Board Index
M C I Trading volum e
Source: Bursa M alaysia
40
60
80
100
120
140
160
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5
D
e
c
-
0
5
The perform ance of the KLCI in 2005 lagged that of other
m ajor global and regional indices. The KLCI ended low er at
899.79 points or w eaker by 0.8% , com pared to 2004s
perform ance. M arket capitalisation declined by 3.7% to
C09 Financial Markets pg198-214 4/14/06, 15:14 202
203
Financial Markets
RM 695.27 billion. M arket activity w as low er, w ith the
annual m arket turnover at 102.3 billion units, w hich w ere
valued at RM 177.1 billion (2004: 108 billion units; RM 216.7
billion). M arket liquidity, in term s of average daily turnover,
fell to 414 m illion units (2004: 435 m illion units).
To a large extent, the w eaker financial perform ance of
public listed com panies (PLCs) affected m arket sentim ent.
Graph 9.10
Performance of Selected Stock Markets Indices
(% change from end-2004 to end-2005)
Source: Bursa M alaysia
-0.8
-0.6
1.4
4.5
6.7
6.8
54.0
13.6
16.2
-10 0 10 20 30 40 50 60
U S N asdaq
H ong Kong H SI
Taiw anTW SE
Thailand SET
Singapore STI
Indonesia JC I
Korea KO SPI
(% ) M alaysia KLC I
U S D JIA
JA N FEB M A R A PR M A Y JU N JU L A U G SEP O C T N O V D EC
Graph 9.11: Performance of the Kuala Lumpur Composite Index in 2005
C oncerns over:
> Expectations of rising global oil
prices and inflation resulting from
H urricane Katrina disaster
> Further expectation of U S
interest rate hike
> Poor dom estic corporate
results
Follow ing the im pact of H urricane
Katrina and Rita, there w ere increased
concerns over further rise in:
> global oil prices
> U S interest rate
> inflation
30 Nov
Bank N egara M alaysia
announced an increase
in O PR of 30bps
to 3.00% .
3 Aug
KLC I recorded
its highest point
at 952.59
External uncertainties:
> U S w eaker econom ic
outlook
> Rising oil prices
> Further increase in oil
prices above U SD 50/barrel
> Rising concerns on inflation
> Liquidation of foreign funds.
800
820
840
860
880
900
920
940
960
KLC I
30 Sep
2006 Budget - Favourable capital m arket m easures
announced. A m ong others are:
1. Prom oting M & A activities through:
> Exem ption of stam p duty and real property
gain tax.
> Elevation of Section 132G of the C om panies
A ct, 1965 for com panies undertaking M & A
activities.
2. Prom oting REITs through tax deductions on legal,
valuation and consultancy expenses.
> D ecline in global oil price.
> A doption of m anaged
float regim e for Ringgit.
> Positive expectations on
restructuring of G LC s.
C oncerns over rising
oil prices, further
hikes in U S interest
rates and its
im plications on
global econom y.
31 May
Low est point
of the year for
the KLC I at
860.73
Im proved m arket
sentim ents
follow ing
G overnm ent's
announcem ent to
probe allegations of
share m anipulation
activities
Based on a sam ple of 351 listed non-financial corporations
(representing close to 84.4% of Bursa M alaysias total
m arket capitalisation), the perform ance of M alaysian PLCs
deteriorated in 2005. A drop of 10.5% in cum ulative net
profit w as recorded in the first three quarters of 2005,
com pared w ith the sam e period in 2004. Annualised
return-on-equity for the sam ple also declined to 8.3% in the
third quarter of 2005 (3Q 2004: 9.7% ) m ainly due to a drop
in the operating profit m argin to 11.8% (3Q 2004: 13.4% ).
W eaker corporate earnings w ere particularly evident in the
construction, properties, m anufacturing and agriculture
sectors. Slow er global dem and for electrical and electronics
products, and increased com petition contributed
significantly to the low er figures reported.
A m arginal deterioration in debt servicing capacity
w as observed. Interest coverage ratio as at third
quarter of 2005 w as 3.93 tim es (2004: 4.69 tim es).
D ebt-to-equity ratio for the sam e period dropped
slightly to 0.60 tim es (2004: 0.63 tim es), m ainly
reflecting the corporate sectors m ove to retire old
debts and lock-in new rates w ith new debt financing.
Therefore, the indebtedness level of the corporate
sector rem ained sustainable as the debt-to-equity
ratio for the third quarter of 2005 w as slightly better
than the average ratio of 0.61 after the C risis.
C09 Financial Markets pg198-214 4/14/06, 14:01 203
204
In term s of total num ber of new listings, M alaysias equity
m arket rem ained an im portant source of capital for
M alaysias corporate sector in 2005. Bursa M alaysia
attracted 79 Initial Public O fferings (IPO s), w hich w as the
highest num ber of listings since 1998. New listings on the
6
22
16 15 16
14
22
7
22 26
17
20
31 46
M ain Board
2005 2004 2003 2002 2001
N o.of C om panies
Graph 9.12
Bursa Malaysia:
Number of New Listings
M ESD A Q M arket
Second Board
6
22
16 15 16
14
22
22 26
17
20
31 46
0
10
20
30
40
50
60
70
80
90
Total:20
Total:51
Total:58
Total:72
Total:79
Source: Bursa M alaysia
7
Bond M arket
RM m illion
Graph 9.13
Funds Raised by the Private Sector in the
Capital Market
Equity M arket
2001 2002 2003 2004 2005
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Despite its lacklustre
performance, Bursa Malaysia
remained an important source
of equity financing for the
Malaysian corporate sector,
especially the small and
medium-sized companies. 79
companies sought listing in
Malaysias equity market,
which was the highest number
since 1998.
M ain Board rem ained strong w ith an annual increase of
6.7% (2004: -6.7% ), w hile new listings on the Second
Board declined by 34.6% (2004: +18.2% ). O ver the years, a
higher num ber of sm all and m edium capitalised com panies
sought financing from Bursa M alaysia. In 2005, slightly m ore
than one-third of the total IPO s w as m ade by com panies
from the technology sector. The M ESDAQ M arket rem ained
effective as a platform for high grow th potential com panies
to seek financing and new investors. IPO s in the trading/
services and industrial products sectors accounted for
22.8% and 24.1% of new shares listed in 2005,
respectively. W hile the IPO s com prised m ainly sm all and
m edium capitalised com panies, seven large com panies and
funds sought listing on Bursa M alaysia. As at end-2005, the
total num ber of listed com panies on Bursa M alaysia w as
1,021 (2004: 963).
Although the total num ber of IPO s increased in 2005 on an
annual basis, total funds raised through the equity m arket
dropped m arginally by 3.1% to RM 6.3 billion, com pared to
RM 6.5 billion in 2004. As in past years, the bulk of these
funds w ere raised through IPO s w hich am ounted to RM 5.3
billion, w hile rights issues am ounted to RM 1 billion (2004:
RM 4 billion and RM 1.5 billion respectively). M ost of the IPO s
w ere oversubscribed, indicating continued strong investor
interest in new listings. 39.5% of the funds raised through
IPO s w ere by the industrial products sector. The property
and finance sectors garnered 24.7% and 20.6% of the
funds raised, respectively. Net funds raised in the equity
m arket constituted about 24.4% of the total net funds
raised by the private sector in the capital m arket in 2005
(2004: 40.5% ).
In line w ith the continued efforts to enhance product
diversification and innovation in the M alaysian financial
system , the year 2005 w itnessed a further broadening of
the M alaysian equity m arket in term s of new products.
Follow ing the success of Real Estate Investm ent Trusts (REITs)
in other regional countries and the G overnm ent's efforts to
accelerate the developm ent of such investm ent vehicles, the
G uidelines on REITs w ere released in January 2005. In 2005,
three REITs w ere listed on Bursa M alaysia. W ith the release
of the G uidelines on Exchange-traded Funds (ETF) in June,
the first ETF, the ABF M alaysian Bond Index Fund, w as listed
on Bursa M alaysia in July 2005.
In 2005, the introduction of new initiatives and m easures for
the equity m arket w ere directed at further enhancing
m arket efficiency, liquidity and integrity. A sum m ary of the
m easures introduced during the year is contained in the
w hite box on Key Capital Market Measures in 2005.
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 204
205
Financial Markets
Key Capital Market Measures in 2005
C apital m arket m easures introduced in 2005 focused on further strengthening the capital m arket by enhancing
liquidity, efficiency, risk m anagem ent, integrity, as w ell as prom oting and accelerating the grow th of the Islam ic
capital m arket. Key m easures introduced in 2005 are sum m arised, as follow s:
Enhancing Liquidity in the Ringgit Bond Market
O n 7 January, the Bank introduced several m easures to further enhance the efficiency of the dom estic bond
m arket by increasing liquidity in the bond m arket and im proving the price discovery process. The m easures
w ere:
i. Repurchase agreements (repo) would be actively used as a monetary instrument to m anage
liquidity in the banking system .
ii. Through the Institutional Securities Custodian Programme (ISCAP), the Bank w ould borrow
securities, m ainly M alaysian G overnm ent Securities (M G S) from m ajor institutional investors, for its repo
operations.
iii. Securities lending facility for principal dealers (PDs) w as enhanced to facilitate the m arket-m aking
activities.
O n 31 M arch, the ringgit-denominated bonds issued by Multilateral Development Banks (MDBs)
and Multilateral Financial Institutions (MFIs) w ere included as eligible securities to be transacted
under repo operations w ith the Bank.
Enhancement of Risk Management Tools in the Bond Market
W ith the liberalisation of foreign exchange adm inistration regulations announced by the Bank on 1 A pril,
residents and non-residents were allowed to enter into hedging arrangements w ith licensed
onshore banks for com m itted inflow s and outflow s of funds.
O n 7 O ctober, the Bank issued the Guidelines on Regulated Short-Selling of Securities. The regulated
short-selling fram ew ork for M G S in the w holesale m arket w as accorded to PD s, interbank participants and
universal brokers.
Removal of Restrictions on the Utilisation of Proceeds from Bond Issuance
W ith effect from 28 M arch, the National Bond Market Committees Negative List was repealed, and
restrictions im posed on the utilisation of proceeds derived from bond issues w ere rem oved. N evertheless,
the restrictions im posed by the Exchange C ontrol G uidelines on Private D ebt Securities for Lead A rrangers
rem ained.
Infrastructure Development and Better Information System for the Bond Market
O n 4 July, the Bank introduced a new version of the Fully Automated System for Issuing/Tendering
(FAST). The new version w as developed as a w eb-based application that is available to both FA ST m em bers
and the public. The new version provided better controls as w ell as greater flexibility in perform ing prim ary
m arket activities.
Since 25 July,information on indicative yields to maturity of government securities (conventional
and Islamic) was published daily to provide m arket participants w ith inform ation on the m arket value of
governm ent securities.
O n 5 D ecem ber, the Securities C om m ission (SC ) allowed a wider group of investors to access the
Information Memoranda and Trust Deeds of ringgit-denominated bond issues database, w hich
w ould assist investors in m aking inform ed investm ent decisions. Previously, the database w as only available
to prim ary subscribers of bonds.
Promoting the Development of Real Estate Investment Trusts (REITs)
O n 3 January, the SC released Guidelines on REITs in an effort to accelerate capital m arket grow th and
establish a vibrant and com petitive REIT industry in M alaysia. Key features included the relaxation of
restrictions on REITs for the follow ing transactions:
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 205
206
Borrow ings lim its;
A cquisition of leasehold properties; and
A cquisitions of real estates that are encum bered by financial charges.
In order to prom ote the developm ent of REITs or Property Trust Funds (PTFs), REITs or PTFs approved by the
SC w ere given the follow ing tax treatm ent:
C hargeable incom e distributed to unit holders w as exem pted from incom e tax; and
The accum ulated incom e that has been taxed and subsequently distributed w as eligible for tax credit by
unit holders.
Promote the Growth of the Islamic Capital Market
O n 21 N ovem ber, the SC issued Guidelines for Islamic REITs to further facilitate the developm ent of a
new Islam ic capital m arket product and thus, m ade M alaysia the first jurisdiction in the global Islam ic
financial sector to issue such guidelines. These guidelines w ere expected to serve as a global benchm ark for
the developm ent of Islam ic REITs.
A new profit-based Government Investment Issues (GII) w as introduced as an additional instrum ent to
the existing discounted-based G II. The profit-based G II w ould be issued at par via the Islam ic concept of Bai
Bithamin Ajil and w ould be characterised by the elem ent of profit, payable every half-yearly until its
m aturity. This instrum ent w as poised to be the new benchm ark for the issuance of long-term Islam ic bonds
and consequently, prom ote m arket liquidity.
Enhancing Liquidity in Exchange-traded Products
O n 28 June, the SC released guidelines to facilitate the introduction of Exchange Traded Funds (ETF),
w hich are open-ended investm ent funds that track specific indices, in an effort to create greater liquidity
w ithin the equity m arket.
O n 28 O ctober, the SC issued enhanced Guidelines to facilitate issuance of structured warrants
aim ed at developing the equity derivatives m arket, building greater m arket liquidity and safeguarding
m arket integrity. In addition, the SC also allow ed the introduction of Bull Equity Linked Structures (Bull
ELS), an investm ent-yielding instrum ent linked to designated shares, w hich provides investors w ith returns
depending on the closing price of the underlying shares on m aturity.
Promoting Quality of MESDAQ Companies
To prom ote the quality and investibility of M ESD A Q com panies, new MESDAQ Market guidelines on
entry requirements w ere released on 29 N ovem ber. These guidelines focused on ensuring com panies
seeking listing are of high quality com panies, encouraging efficient and effective price-discovery process,
enhancing the m ethod of securities distribution and im proving corporate governance.
Liberalisation of Central Depository System (CDS) Accounts Requirements
Effective 21 O ctober, the SC announced the liberalisation of CDS accounts requirements to allow a
w ider group of individuals to hold securities on behalf of others.
Providing Greater Flexibilities for Merged Stockbrokers
Stockbroking companies which completed 1+1 mergers w ere perm itted to undertake additional
activities of business, as follow s:
A llow ed to undertake a full range of corporate advisory services, subject to certain criteria, such as
shareholdersfunds of at least RM 100 m illion;
Perm itted to operate futures broking activities w ithin the stockbroking entity; and
A llow ed to do unrestricted branching from 2006 onw ards.
Enhancing Investor Protection
O n 15 M arch, the SC introduced com pliance guidelines for fund managers to further strengthen the level
of investor protection, w hich required fund m anagers to adhere to best practices for the follow ing operations:
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 206
207
Financial Markets
Trading and portfolio m anagem ent;
M eeting know your clientsobligations;
Proper execution of the roles and responsibilities of the Board of D irectors and C om pliance O fficers;
Safeguarding of clientsassets; and
C om pliance w ith the A nti-M oney Laundering A ct 2001.
Further Liberalisation in the Capital Market
O n 15 Septem ber, the SC introduced several m easures to facilitate the diversification of investm ents by
dom estic investors and further enhance the efficiency of the M alaysian capital m arket. These m easures
include:
i. The fram ew ork on investm ents in foreign securities w as revised to allow investors to invest in
foreign securities listed on recognised foreign exchanges;
ii. Regulations on secondary m arket trading of non-ringgit bonds w ere liberalised to allow sophisticated
investors(i.e. com m ercial banks, m erchant banks, Islam ic banks, universal brokers or consolidated
brokers) to execute secondary trades of non-ringgit bonds without seeking approval from the
SC;
iii. The fram ew ork for prim ary offerings of non-ringgit bonds w ere revised to give flexibility for the
issuance of foreign currency-denominated bonds to sophisticated investors; and
iv. The offering of foreign shares in Malaysia w as perm itted subject to the SC s approval.
The above m easures com plem ented the liberalisation of foreign exchange adm inistration rules by the Bank
on 1 A pril.
Improving Efficiency through Electronic Means
O n 17 February, the SC launched the Electronic Licensing Application System (ELA) to facilitate online
subm ission and retrieval of inform ation betw een SC and m arket participants. This effort w as follow ed by
the rollout of the Continuing Professional Education (CPE) Tracker System on 25 February.
O n 28 A pril, the SC released guidelines of electronic contract note in an effort to provide value-added
services to investors.
Facilitating Corporate Sector Development
To further facilitate faster execution of corporate proposals that require SC s approval (such as share
buybacks, m ergers and executions, etc.), prospectuses received by the SC w ill be reviewed on a post-
vetting basis beginning 3 O ctober. H ence, com panies w ould be able to issue a prospectus w ithin tw o
w eeks upon lodgem ent w ith the SC . In addition, to reduce the tim e to m arket, com panies involved in
takeovers w ould be required to issue offer docum ents containing detailed conditions w ithin 21 days from
the date of takeover notice, com pared to 35 days previously.
To encourage public listed com panies to expand and com pete globally, exemptions were given for
stamp duty and real property gains tax on merger and acquisitions (M&As) undertaken by
com panies listed on Bursa M alaysia. This exem ption w as given to M & A s approved by the SC from 1
O ctober 2005 to 31 D ecem ber 2007. Such M & A s m ust be com pleted not later than 31 D ecem ber 2008.
Providing a Facilitative Framework for Approval of Negotiable Instruments of Deposit
The SC issued Practice N ote 3 to the Private D ebt Securities (PD S) G uidelines and Practice N ote 3 to the
Islam ic Securities (IS) G uidelines on 6 A pril and 12 D ecem ber respectively, to provide a m ore facilitative
framework for the approval of negotiable instruments of deposit (NIDs) and Islamic NIDs w ith
tenures of m ore than five years. The PD S G uidelines and IS G uidelines w ould no longer govern the approval
process for N ID s and Islam ic N ID s issuances by licensed institutions or Islam ic banks. The new fram ew ork
w ould facilitate a faster approval process.
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 207
208
Bond Market
The bond m arket continued to be an im portant
source of funds, m obilising total net funds of RM 35.4
billion for the year 2005 (2004: RM 36.2 billion). A s a
result, the size of the ringgit bond m arket registered
a 9.5% grow th, w ith the total bonds outstanding
reaching RM 397.6 billion (80.4% of G D P) as at end-
2005. O f significance, the net private debt securities
(PD S) issuance of RM 19.6 billion in 2005 w as the
highest since 2000, and thus contributed to a larger
share of 55.3% of total net funds raised (2004:
26.3% ).
The fiscal consolidation by the Federal G overnm ent
resulted in a low er net funds raised, totalling RM 13.5
billion (2004: RM 26.4 billion). The Federal
G overnm ent issued and reopened a total of 13
M alaysian G overnm ent Securities (M G S) and tw o
G overnm ent Investm ent Issues (G IIs). The auctioning
of the G overnm ent securities w ere carefully planned
to ensure a sm ooth functioning of the m arket as w ell
as to m inim ise the financing costs to the
G overnm ent. D uring the year, the G overnm ent m ade
an inaugural issuance of a 20-year M G S, continuing
its efforts to lengthen the benchm ark yield curve.
Sim ilarly, the m aturity for G II w as also lengthened
from 7-year to 10-year for building the Islam ic
benchm ark yield curve, a critical com ponent for the
developm ent of the Islam ic bond m arket. In addition,
the G overnm ent introduced a new profit-based G II,
based on the bai bithaman ajil concept, as an
additional instrum ent to the existing discounted-
based G II. The new G IIs are poised to be the new
benchm ark for the issuance of long-term Islam ic
bonds and consequently, w ill prom ote m arket
liquidity for Islam ic papers. M eanw hile, the Bank
continued to issue M erdeka Savings Bond (M SB) on a
quarterly basis, providing additional investm ent
instrum ents for senior citizens, retired M alaysian
A rm ed Forces personnel and M alaysian citizens w ho
have retired on m edical grounds. Inclusive of the
issuance of Khazanah bonds, the public sector raised
net funds of RM 15.8 billion (2004: RM 26.7 billion).
Fund raising activity by the
private sector in the bond
market increased, encouraged
by prevailing low yields.
Table 9.5
Funds Raised in the Bond Market
2004 2005p
RM m illion
By Public Sector
G overnm ent Securities (gross) 43,173 28,276
Less Redem ptions 18,200 15,800
Equals N et Federal Receipts 24,973 12,476
G overnm ent Investm ent Issues (net) 1,423 1,000
Khazanah Bonds (net) -1,198 833
M alaysia Savings Bond (net) 1,474 1,516
Net Funds Raised 26,671 15,825
By Private Sector
Private D ebt Securities (gross) 36,340 38,196
Straight Bonds 4,313 3,869
Bonds w ith W arrants 60 0
C onvertible Bonds 4,301 3,745
Islam ic Bonds 9,104 9,537
A sset Backed Securities 2,958 6,210
M edium Term N otes 7,315 12,296
C agam as Bonds 8,290 2,540
Less Redem ptions 26,814 18,617
Private D ebt Securities 19,648 13,432
C agam as Bonds 7,166 5,185
Net Funds Raised 9,526 19,579
Net Funds Raised in the Bond Market 36,197 35,404
Private Debt Securities, (excluding
Cagamas) gross 28,050 35,656
Net Funds Raised in the Bond Market,
excluding Cagamas 8,402 22,224
N et Issues Short Term Securities,
C om m ercial Papers
1
-3,208 1,579
Total 32,990 36,982
1
Refers to C agam as N otes and C om m ercial Papers.
p Prelim inary
% of G D P
Public sector
Private sector
Public sector over G D P
Private sector over G D P
Ringgit Bonds over G D P
Graph 9.14
Total Bonds Outstanding
RM billion
149 125 117 191
179
153
161
188
207
39
35
35
38
39
42
48
42
45
42
0
50
100
150
200
250
300
350
400
450
2001 2002 2003 2004 2005
20
30
40
50
60
70
80
90
83
81
77
83
80
175
In the private sector, corporations stepped up issuances
of PD S to capitalise on the flattening and declining yield
curves at the longer-end in an environm ent of am ple
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 208
209
Financial Markets
liquidity and strong dem and for long-term securities by
investors. The strengthening of the private sector-led
econom ic grow th contributed to the expansion of the
PD S m arket. A s at end-2005, the PD S m arket accounted
for 24% of total debt financing to the private sector,
com plem enting the banking system in providing
corporations w ith opportunity to structure their balance
sheet in line w ith their business requirem ents.
Issuances of PD S w ere m ade by 95 corporations. In total,
these com panies raised gross funds of RM 35.7 billion
(2004: RM 28 billion), w hile C agam as Berhad raised the
balance of RM 2.5 billion (2004: RM 8.3 billion).
C onsistent w ith the trend in 2004, the issuances of PD S
w ere m ainly to finance new business activity, w hich
accounted for 49.5% of total issuances, follow ed by
refinancing of existing debt. M eanw hile, bonds issued by
C agam as Berhad w ere reduced significantly due to the
am ple liquidity in the banking system . A fter netting out
redem ptions during the year, net funds raised by the
private sector am ounted to RM 19.6 billion, the highest
am ount recorded since 2000. Excluding C agam as bonds,
net PD S issuance totalled RM 22.2 billion, the highest
am ount ever recorded by the PD S m arket.
Corporations in the finance, real estate and business services
sector w ere the m ain issuers, follow ed by com panies in the
utilities and construction sectors, accounting for 36.8% ,
19.6% and 17.8% of the total PDS issued respectively. The
higher issuance in the finance and business services sector
partly reflected the new issuance of asset-backed (ABS)
securities originated by financial institutions and residential
m ortgage-backed securities issued by Cagam as M BS
Berhad. In the utility and construction sectors, m ajor issuers
w ere the com panies involved in the w ater projects and
independent pow er producers, w hich continued to tap the
capital m arket to finance their long-term financing needs.
During the year, the m aturity profile of the PDS m arket
lengthened further w ith the issuance of bonds w ith a 33-
year tenure, by a com pany involved in infrastructure
projects. The tenure of the PDS issuances in 2005 also
shifted above 10 years, reflecting the issuersdecision to
lock-in the prevailing low yields and hedge possible future
interest rates rise. The issuers w ere m ainly com panies
involved in pow er production and infrastructure projects,
w hich have long gestation periods and w ould therefore
benefit from long-term financing that m atches their
projected cashflow . The percentage of short to m edium -
term securities w ith tenure betw een one to five years
declined to 34.5% , com pared to 45.6% in 2004.
M eanw hile, Cagam as M BS extended its Islam ic Residential
M ortgage Backed Securities (RM BS) to 20 years, thereby
lengthening the benchm ark curve for the ABS asset class
and allow ing m arket participants to price bonds w ith
equivalent tenures.
In term s of the types of instrum ents, Islam ic securities
(including Islam ic M edium Term Notes) rem ained the m ost
2004 2005
1
Excluding C agam as
Graph 9.15
Utilisation of Bond Proceeds
1
26.5
11.3
7.0
8.8
46.5
28.2
5.8
2.8
13.7
49.5
0
% of total
10 20 30 40 50 60
Refinancing
Restructuring
M ergers
and acquisitions
O thers
N ew activities
Table 9.6
New Issues of Private Debt Securities by Sector
1
Sector
2004 2005
p
RM million % share RM million % share
A griculture, forestry and fishing 0.0 0.0 892.8 2.5
M ining and quarrying 0.0 0.0 630.0 1.8
M anufacturing 3,264.5 11.6 2,796.3 7.8
C onstruction 8,844.9 31.5 6,356.1 17.8
Electricity, gas and w ater supply 7,840.2 28.0 6,976.2 19.6
Transport, storage and com m unication 796.0 2.8 2,623.3 7.4
Financing, insurance, real estate and business services 4,767.8 17.0 13,122.7 36.8
G overnm ent and others 1,315.4 4.7 1,126.7 3.2
W holesale and retail trade, restaurants and hotels 1,221.1 4.4 1,132.0 3.2
Total 28,049.9 100.0 35,656.1 100.0
1
Excluding C agam as.
p Preliminary
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 209
210
favoured form of debt securities financing, and accounted
for slightly m ore than half of total PDS issued. The
im plem entation of tax incentives for Islam ic products as w ell
as m easures taken since 2004 to develop a m ore innovative
and sophisticated Islam ic capital m arket resulted in higher
issuance of Islam ic products during the year. An
encouraging developm ent w as the issuance of Islam ic debt
securities backed by future property tax assessm ent
collections by a local authority. The bond w as issued based
on the mudharabah (profit-sharing) concept, w hich w as not
w idely used previously. The issuance prom oted the scope
and depth of the Islam ic bond m arket. M eanw hile,
Cagam as M BS Berhad issued the inaugural issuance of
Islam ic RM BS during the year.
In an environm ent of continued excess liquidity in the
financial system , bonds issued by Cagam as Berhad declined,
w ith 12 issuances of debt securities (including tw o re-
opening exercise) am ounting to RM 2.5 billion (2004: 18
issues totaling to RM 9.3 billion). O ut of these 12 issues,
seven w ere issued in the form of fixed rate bonds w hile the
rem aining as Islam ic securities. The Cagam as Islam ic
securities, w hich w ere previously know n as Sanadat
Cagam as, are now renam ed as Cagam as BAIS (bai
bithaman ajil Islam ic Securities).
In the securitisation m arket, Cagam as M BS Berhad issued
tw o issues of RM BS backed by the G overnm ents staff
housing loans in August and Decem ber. The first issue
involved RM 2.05 billion of Islam ic RM BS based on
musyarakah principle w hile the second issue involved
Graph 9.16
PDS Issues by Tenure (excluding Cagamas)
2005
15.1 - 20 yrs
2.4%
20.1 yrs and
above
2.2%
2004
10.1 - 15 yrs
8.5%
20.1 yrs and
above
3.0%
5.1 - 10 yrs
42.9%
1 - 5 yrs
45.6%
1 - 5 yrs
34.5%
5.1 - 10 yrs
35.9%
10.1 - 15 yrs
25.1%
Graph 9.17
PDS Issues by Type of Instrument
(excluding Cagamas)
C onventional
M TN
9.2%
A sset Backed
Bond
17.4%
Islam ic
M TN
23.0%
A BS M TN
2.3%
Straight Bonds
10.8%
C onvertible
Bonds
10.5%
Islam ic Bonds
26.7%
[C onventional: 0.7% ]
[Islam ic: 1.6% ]
[C onventional: 10% ]
[Islam ic: 7.4% ]
Graph 9.18
ABS Outstanding: Types of Underlying Assets
(As at end-December 2005)
Private debt
securities
3.8%
H ire purchase
receivables
7.6%
C redit card/charge
card
0.2%
O ther
receivables
19.1%
Loans
24.0%
Property and
m ortgage
receivables
45.3%
C09 Financial Markets pg198-214 4/14/06, 13:30 210
211
Financial Markets
RM 2.06 billion of conventional RM BS. The Islam ic
musyarakah principle bond w as the w orlds first rated
Islam ic RM BS. In addition, six new ABS (including ABS
M TN) w ere issued during the year backed by underlying
assets such as hire-purchase receivables, land and other
receivables. In total, the new issues of ABS securities
am ounted to RM 7 billion and accounted for 19.6% of
total gross PDS issued in 2005.
Rating activity during the year rem ained robust w ith 156
new long-term PD S issues valued at RM 42.3 billion
being rated by both the Rating A gency M alaysia (RA M )
and M alaysian Rating C orporation Berhad (M A RC ). The
long-term issues accounted for 79% of the total gross
value rated. In term s of rating classes, m ost of the PD S
w ere classified in the A A A , A A and A categories.
Throughout the year, 330 rating review s on existing
long-term debt securities w ere conducted by both
agencies, w here 276 issues w ere reaffirm ed, 31
upgraded and 23 dow ngraded. In com parison w ith the
previous year, the proportion of upgrades increased
from 7.2% to 9.5% of total review s, w hile the
percentage of dow ngrades w as also higher at 7% of
total review s, against 3% in the previous year.
The ringgit bond yield curves flattened significantly
during the first three quarters of the year, reflecting a
sim ilar phenom enon of flattening yield curves
experienced globally. D uring this period, w hile the
short-end of the M G S yield curve held relatively firm ,
the 10-year M G S yield declined by 78 basis points,
driven by the am ple liquidity situation coupled w ith a
high dem and for bonds am idst low er M G S issuances.
The declining yields w ere also a result of the increasing
am ount of foreign capital flow s into ringgit assets as
investors sought higher returns. C onditions in the
secondary m arket w ere also influenced by concerns over
the im pact of rising oil prices on the inflation and
econom ic outlook. The yield curves rem ained stable
after the rem oval of the ringgit peg in July, as dem and
for long-term bond continued to be high and the
m arket proved resilient to capital outflow s.
By early Septem ber, the short-end of the yield curve
rose, indicating that the m arket had begun to price-in
the prospects of possible higher interest rates, follow ing
signs of im proved econom ic activity and higher inflation
rate. N evertheless, investors took a cautious stance in
trading, after taking into account the possible changes
in dom estic interest rates, as w ell as the m agnitude of
the M G S issuances for the quarter. The M G S yields
firm ed up across the different tenures by the end of the
year, follow ing the 30 basis points rise in the overnight
policy rate on 30 N ovem ber. For the year as a w hole,
the short-end 1-year M G S yields rose by 106 basis
points, w hile the 10-year M G S yields declined by 50
basis points. These developm ents resulted in the
flattening of the yield curve during the year.
M eanw hile, spreads on corporate bonds rem ained
stable, w hich suggested that there w as little change in
m arket participantsperception of corporate credit risks.
Trading in the ringgit bond m arket averaged RM 1.4
billion daily, and am ounted to RM 355.7 billion for the
year (2004: RM 355.9 billion), w ith trading of M G S
accounting for 50.4% of total trade. Trading activity in
corporate bonds increased to 26.6% of total
(2004:18.1% ) as investors searched for higher yields from
the PD S m arket. Trading activity in C agam as papers fell
significantly follow ing the low er issuance of C agam as
papers during the year. Liquidity, as m easured by the ratio
of trading volum e to total outstanding bonds, w as
Graph 9.19
Rating Distributions of Outstanding PDS
(As at end-December 2005)
%
% of total value
% of total issues
Source: RA M and M A RC
0
5
10
15
20
25
30
35
40
45
A A A A A A BBB BB B C D
1 2 3 4 5 6 7 8 9 10
Graph 9.20
MGS Benchmark Yields
%
Years to M aturity
D ec-05 M ar-05 Jun-05 Sep-05
2.0
2.5
3.0
3.5
4.0
4.5
5.0
D ec-05
3-yr: 3.518
5-yr: 3.725
10-yr: 4.238
June-05
3-yr: 3.168
5-yr: 3.403
10-yr: 4.250
C09 Financial Markets pg198-214 4/14/06, 14:00 211
212
highest for G II and Khazanah bonds, at 4.28 tim es and
1.84 tim es, respectively. Liquidity for corporate bonds,
how ever, w as the low est at 0.5 tim es the outstanding
am ount.
The introduction of ISC A P (Institutional Securities
C ustodian Program m e), w hich involved the active use of
repo in m onetary operations, com bined w ith the M G S
lending facility provided by the Bank to the principal
dealers since the beginning of the year, helped
im proved the perform ance of the repo m arket
significantly. Repo transactions increased by 88.2% to
RM 347.8 billion (2004: RM 184.8 billion), w ith 76% of
the total focused in the M G S m arket.
O n the international front, credit spreads on M alaysias
sovereign bonds narrow ed in the first three quarters,
follow ing higher dem and for A sian dollar credits as
econom ic fundam entals im proved and investors seeking
Graph 9.21
Turnover of Selected Debt Securities (Jan-Dec 2005)
Total: RM355.7 billion
Khazanah bonds
5.7%
G overnm ent
Investm ent Issues
12.1%
Listed PD S
0.1%
C agam as bonds
5.1%
O ther unlisted PD S
24.2%
A BS
2.3%
M alaysian
G overnm ent Securities
50.4%
better returns. The credit spreads w idened in the fourth
quarter partly due to the increase in interest rates in
m ajor m arkets, as w ell as concerns over higher
inflationary pressure follow ing the high oil prices.
A s part of the initiatives to broaden and deepen the
dom estic and regional bond m arkets in East A sia Pacific
region, the EM EA P group launched the first regional
bond fund or A sian Bond Fund 1 (A BF1) in June 2003.
Follow ing from the success of the U S dollar A BF1, the
EM EA P C entral Banks launched the A sian Bond Fund 2
(A BF2) in D ecem ber 2005, w hich is m andated to invest
in bonds denom inated in local currencies of selected
m em ber countries nam ely PR C hina, H ong Kong C hina,
Indonesia, Korea, M alaysia, Philippines, Singapore and
Thailand. The A BF2 w as launched w ith the objective of
prom oting the dom estic currency bond m arket and
introducing bonds of m ulti currencies in a basket as a
new asset class for investors. The launching of the
A BF2 also led to the inaugural listing of the A BF
M alaysian country sub-fund or A BF M alaysian Bond
Index Fund on Bursa M alaysia, w hich com prised
investm ents in ringgit denom inated G overnm ent and
quasi G overnm ent securities. The listing of the A BF
M alaysian Bond Index Fund (the first Exchange Traded
Fund in M alaysia) w ould add m ore diversity to the
listings on Bursa M alaysia and eventually greater
liquidity in the dom estic bond m arket.
Several m easures w ere introduced in 2005 to further
strengthen the bond m arket. The detailed bond
m arket m easures are explained in the box Key
Capital Market Measures in 2005.
Exchange-traded Derivatives Market
The exchange-traded derivatives m arket in M alaysia
rem ained active during the year although trading
volum e declined. Turnover on Bursa M alaysia D erivatives
dropped by 6.6% (2004: +32% ). W hile the annual
trading volum e decreased slightly to 2.5 m illion
Table 9.7
Sovereign Over US Treasury Benchmark
Benchm ark D ec-04 M ar-05 Jun-05 Sep-05 D ec-05
MALAYSIA 09 5-yr U ST 47 65 58 45 55
MALAYSIA 11 5-yr U ST 92 88 68 54 60
CHINA 11 5-yr U ST 85 66 75 52 61
INDONESIA 06 2-yr U ST 65 108 49 75 52
KOREA 08 2-yr U ST 56 68 44 10 3
PHILIPPINES 10 5-yr U ST 377 253 236 119 97
THAILAND 07 2-yr U ST 54 64 64 40 65
PETRONAS 06 2-yr U ST 49 45 44 37 39
Source: Bloom berg.
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 212
213
Financial Markets
Table 9.8
Performance of Bursa Malaysia Derivatives Products
Share of total


Turnover
volum e in
2004 2005
Bursa M alaysia
Products
D erivatives (% )
N um ber of
A nnual A verage
N um ber of
A nnual A verage
lots
change daily
lots
change daily 2004 2005
(% ) volum e (% ) volum e
C PO Futures 1,378,334 -3.6 5,603 1,158,510 -15.9 4,709 52.3 47.1
Open interest position
(as at end-year) 28,314 28,918
Palm Kernel O il Futures 449 n.a. 2 - -100 - 0.02 -
KLC I Futures 1,088,419 228.6 4,424 1,111,575 2.1 4,519 41.3 45.2
Open interest position
(as at end-year) 10,092 17,814
KLC I O ptions - - - - - - - -
3-m onth KLIBO R Futures 141,969 18.6 577 162,592 14.5 661 5.4 6.6
Open interest position
(as at end-year) 27,418 37,966
3-year M G S Futures 4,327 454 18 9,753 125.4 40 0.2 0.4
5-year M G S Futures 19,494 -83.6 79 17,215 -11.7 70 0.7 0.7
Open interest position
(as at end-year) - 150
10-year M G S Futures - -100 - 100 100 0.4 - -
n.a. N ot available
Source: Bursa M alaysia D erivatives Berhad
contracts (2004: 2.6 m illion), trading perform ance
rem ained high for the third consecutive year since 2003.
In term s of average daily volum e, the financial futures
contracts, especially the KLC I Futures and the 3-m onth
KLIBO R Futures, continued to im prove com pared to the
year before. Though relatively sm all, the m odest grow th
recorded during the year in the financial futures m arket
w as largely due to increased interests by financial
institutions in taking hedging positions against
anticipated interest rate hikes.
The C rude Palm O il (C PO ) Futures m arket continued to
be the m ost active on the Bursa M alaysia D erivatives
m arket in 2005, accounting for 47% of the total
volum e transacted during the year. H ow ever, the total
contracts cleared during the year declined by 15.9% to
1.16 m illion contracts (2004: 1.38 m illion contracts),
representing a notional value of 28.96 m illion tonnes of
crude palm oil. The decline w as attributed to a
significantly reduced price range of RM 252 (2004:
RM 621) for the benchm ark 3-m onth C PO contract,
im plying a reduction in volatility in the m arket.
M eanw hile, no contracts w ere traded at the C rude Palm
Kernel O il (C PKO ) Futures m arket during the year.
The 3-m onth C PO Futures com m enced the year trading
at RM 1,378 per tonne, and initially declined to the
low est daily traded price of RM 1,252 per tonne on 2
February. The decline in prices w as caused by the
bum per C PO output recorded in January. H ow ever,
prices soon recovered to register the highest daily
traded price of RM 1,504 per tonne on 16 M arch.
Thereafter, prices consolidated to a tight range of
betw een RM 1,380 and RM 1,430 per tonne for the rest
of the year. The upw ard m om entum in prices w as
40,000
50,000
60,000
70,000
80,000
-
100,000
200,000
300,000
400,000
500,000
600,000
Graph 9.22
Bursa Malaysia Derivatives : Total Monthly
Volume And Month-end Open Interest
C ontracts C ontracts
Source: Bursa M alaysia D erivatives
Volum e (LH S)
O pen Interest (RH S)
J
a
n
-
0
4
F
e
b
-
0
4
M
a
r
-
0
4
A
p
r
-
0
4
M
a
y
-
0
4
J
u
n
-
0
4
J
u
l
-
0
4
A
u
g
-
0
4
S
e
p
-
0
4
O
c
t
-
0
4
N
o
v
-
0
4
D
e
c
-
0
4
J
a
n
-
0
5
F
e
b
-
0
5
M
a
r
-
0
5
A
p
r
-
0
5
M
a
y
-
0
5
J
u
n
-
0
5
J
u
l
-
0
5
A
u
g
-
0
5
S
e
p
-
0
5
O
c
t
-
0
5
N
o
v
-
0
5
D
e
c
-
0
5
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 213
214
lim ited by the overall strong increase in C PO production,
and rising stocks in M alaysia, coupled w ith higher
harvests of palm oils closest com petitor, soybean, in the
U S, Brazil and A rgentina. O n the other hand, robust
export volum e, as w ell as m arket participants
favourable expectations on future dem and for palm oil-
based bio-diesel, established a floor on C PO prices that
contributed to the reduced volatility in the prices of the
C PO futures m arket during the year. The 3-m onth C PO
(100)
200
500
800
1,100
1,400
1,700
2,000
0
20
40
60
80
100
120
Graph 9.23
Crude Palm Oil Futures
Lots ('000) Price (RM /tonne)
J F M A M J J A S O N D J F M A M J J A S O N D
Lots
O pen interest
3rd m onth average futures prices (RH S)
2005 2004
Source: Bursa M alaysia D erivatives
futures ended the year at RM 1,397 per tonne, w hich
w as 1.4% higher than the price at the start of the year.
The KLC I Futures m arket in 2005 recorded a sm all
increase of 2.1% (2004: 229% ) in trading activity, w ith
average daily volum e still higher than in the previous
year. The derivatives liquidity ratio, w hich represents the
ratio betw een the turnover value of futures against the
turnover value of underlying KLC I com ponent stocks,
increased to 48.9% in 2005 (2004: 46.9% ). In tandem
w ith the lacklustre perform ance of the KLC I, the grow th
of KLC I Futuresvolum e w as im pinged by poorer than
expected m arket sentim ents, follow ing concerns
regarding the im plications of high oil prices.
A ctivity in the financial futures m arket continued to
show overw helm ing interest. The im provem ent in
m arket sentim ents w as m ainly influenced by changing
expectations on econom ic grow th and expectations
about dom estic interest rates. Participants of the
financial futures m arket w ere predom inantly dom estic
institutions, w hich accounted for m ore than 95% of
total trading activity. The 3-m onth KLIBO R Futures
continued to record a positive grow th of 14.5% (2004:
18.6% ). Total turnover of M G S futures increased by
13.6% (2004: -80.1% ). The 3-year M G S futures
contributed significantly to the higher perform ance and
registered an im pressive grow th of 125.4% , due
prim arily to the concentration of the underlying m arket
activity in the shorter tenures.
C09 Financial Markets pg198-214 3/14/06, 9:17 PM 214
The Payment and
Settlement Systems
M anagem ent of the Paym ent System
Reducing Risks in the Paym ent System
M anaging Paym ent System Stability and C onfidence
Enhancing C om petition and Increasing Paym ent Efficiency
M igration to Electronic Paym ents
M oving Fow ard
Perform ance of the Paym ent System s
216-217
217
217-218
218-220
220-221
221-223
223-227
216
The Payment and Settlement Systems
MANAGEMENT OF THE PAYMENT SYSTEM
In prom oting an efficient, reliable and secure paym ent
system that w ill contribute to financial stability and the
effective functioning of financial m arkets, the key
policy thrust during 2005 rem ained on enhancing
safety and reducing risks in the paym ent system as w ell
as enhancing the use of electronic paym ents. In this
regard, the Bank continued its efforts in the
developm ent and im provem ent of the countrys m ajor
paym ent system infrastructure, ensuring their
robustness and the effective m itigation of system ic
risks in the paym ent system .
The key policy thrust during
2005 remained on enhancing
safety and reducing risks in
the payment system as well as
enhancing the use of
electronic payments.
D uring the year, live runs w ere conducted w ith the
banking industry to ensure the robustness of the
paym ent system s operated by the Bank, as w ell as its
business continuity plans. In pre-em pting system ic risk
in interbank foreign exchange settlem ents, the Bank
had also com m enced w ork to build a paym ent versus
paym entm echanism .
In the area of retail paym ent system s and instrum ents,
the Banks focus has been to ensure sustained public
confidence in their use to facilitate the effective
functioning of com m erce. The Bank continued
therefore to play its role as a catalyst in the
developm ent of the retail paym ent infrastructure and
facilitating industry w ide collaborative efforts to
strengthen paym ent security standards. The Bank
facilitated the full m igration of the countrys credit card
infrastructure to Europay-M asterC ard-Visa (EM V) chip
standard w ith the com pletion of the conversion to
EM V-com pliant term inals during the year.
C onsequently, M alaysia becom es the first country in
the A sia Pacific region to fully m igrate to the chip
environm ent, boosting the confidence of consum ers,
tourists and m erchants in the use of paym ent cards in
the country.
In ensuring the safety and confidence in Internet
banking transactions provided by the banking
institutions, additional security m easures are being
im plem ented to com bat online fraud, including
identity theft. To pre-em pt the threat of m oney
laundering and terrorism financing activities conducted
via the paym ent system , m easures to prom ote the use
of form al rem ittance channels w ill be introduced to
deter the use of inform al paym ent system s. A s such,
qualified non-banking institutions w ould be allow ed to
offer rem ittance services w hile banking institutions
m ay appoint collecting agents to facilitate their
rem ittance transactions.
The second focus area w as on enhancing com petition
and im proving paym ent efficiency. C onsistent w ith the
Financial Sector M asterplan to increase com petition
and efficiency in the paym ent system , the policies that
only allow banks to offer retail paym ent services w ere
liberalised. The paym ent landscape continues to evolve
w ith the banking and non-banking institutions
introducing new paym ent services that leverages on
m odern technology such as the Internet, sm art cards
and m obile phones. W hile these developm ents
prom ote com petition and efficiency, they also
introduce new risks in the paym ent system . This poses
new challenges to the Bank in the oversight of the
paym ents system s to ensure that the prudential
guidelines w ill effectively address the risks and at the
sam e tim e, prom ote innovation w hile not inhibiting
m arket potential.
The third focus area in 2005 w as on prom oting the
m igration to cost efficient electronic paym ents. W ith
the m igration of the autom ated teller m achine (ATM )
card to the chip infrastructure, m ulti-applications such
as the debit and electronic purse applications have
been incorporated into the ATM card to facilitate
point-of-sale transactions at m erchant outlets. D ebit
card transactions has increased at the rate of 24.6%
per annum in the recent three years. Its total
transaction value of RM 240.1 m illion how ever, rem ains
insignificant com pared w ith credit card spending of
RM 40.9 billion in 2005. N evertheless, there is
significant grow th for the debit card, particularly w ith
the increase in the num ber of term inals and m erchants
that accept the interbank e-D ebit transactions and also
additional financial institutions participating as
acquirers. Significant grow th w as also seen in the use
of Interbank G IRO (IBG ) system and Internet banking
services. The IBG system recorded a high grow th rate
of 162.2% per annum w hile Internet banking
transactions increased at a rate of 80.8% per annum
over the past three years. W hilst there have been
C10_Payment System pg216-228 3/14/06, 9:18 PM 216
217
Payment and Settlement Systems
prom ising grow th in electronic paym ents, the paym ent
system in M alaysia rem ains predom inantly paper-based
w ith cheque paym ents still accounting for 95.1% of
the total value of non-cash paym ents in 2005.
In m anaging the transition to a m ore electronic-based
paym ent system , the Bank continues to w ork w ith the
banking institutions and the m ajor retail paym ent system
operator, M alaysian Electronic Paym ent System (1997)
Sdn. Bhd. (M EPS), in developing and im proving the
countrys paym ent system infrastructure to provide m ore
efficient and tim ely paym ent services. The IBG Review
Team , established by the Bank, has identified a num ber
of focus and im provem ent areas w here M EPS as the
system operator, and the banks m ust address to m ake
the system m ore efficient. This w ill enable the banks to
deliver a higher quality service level to their custom ers,
w ith tangible benefits in term s of cost reductions and
enhanced revenue and profitability. D uring the year, the
Bank has also taken several m easures to facilitate the
adoption of electronic paym ents in the G overnm ent
sector, resolution of an industry issue on credit cards
acceptance at petrol stations and organised the countrys
first paym ent system forum and exhibition. These efforts
w ere m ade to prom ote a m ore w idespread use of
electronic paym ents to im prove paym ent efficiency and
to be able to take advantage of econom ies of scale.
A s significant investm ents have been m ade in
establishing and enhancing the electronic delivery
channels and paym ent system s in the recent years, the
focus is now on increasing accessibility, im proving
service levels and prom oting its active use to reap
econom ies of scale benefits and realise the efficiency
gains. M alaysia is still a high user of cheques and cash,
and therefore the potential cost savings in m oving to
electronic technology for m aking paym ents is
substantial.
REDUCING RISKS IN THE PAYMENT SYSTEM
The prom otion of a secure and effective paym ent
system is recognised as one of the m ain pillars of the
Bank, alongside the m aintenance of financial and
m onetary stability. In this regard, the Bank has an
im portant responsibility in m inim ising system ic risks in
the paym ent system , particularly for the large value
interbank paym ents w here the im pact of a failed
paym ent transaction can spill over to other banking
institutions, leading to a system ic crisis. A s part of a
continuing effort in prom oting effective, safe and
efficient paym ent system s, the Bank is im plem enting a
"paym ent versus paym ent" (PvP) infrastructure for
settling interbank foreign exchange transactions.
Foreign Exchange Settlement Risk
The PvP m echanism w ill be established jointly w ith the Hong
Kong M onetary Authority, to facilitate sim ultaneous
settlem ent of interbank US dollar and ringgit foreign
exchange transactions during the M alaysian business hours.
Under this m echanism , the ringgit part of the transaction
w ould be settled through the RENTAS w hile the US dollar
part w ould be settled sim ultaneously through the USD
CHATS system in Hong Kong China. The PvP m echanism
w ould enable financial institutions to reduce the settlem ent
risks associated w ith foreign exchange transactions.
MANAGING PAYMENT SYSTEM STABILITY AND
CONFIDENCE
D uring 2005, the Bank as the operator of the REN TA S
and SPIC K system s, continued to ensure that its D isaster
Recovery Planning (D RP) arrangem ents w ith its
The Bank has an important
responsibility in minimising
systemic risks in the payment
system, particularly for the
large value interbank
payments.
Measures were taken to ensure
the continued reliability of the
major payment systems and to
sustain public confidence and
trust in the payment
instruments.
m em ber institutions are operational and effective
through regular live runs. In its oversight role, the
Bank supervises and m onitors m ajor paym ent
operators and designated paym ent instrum ent
issuers to ensure that they continue to operate in a
sound m anner. The off-site m onitoring is also
com plem ented w ith on-site exam inations to identify
gaps that need to be addressed to ensure
sustainability of operations. The Bank had also
continued its role as a facilitator in coordinating
industry efforts to enhance the retail paym ent
infrastructure and also address com m on security
threats on an industry-w ide basis. These m easures
w ere taken to ensure the continued reliability of the
m ajor paym ent system s and to sustain public
confidence and trust in the paym ent instrum ents.
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218
Disaster Recovery Planning
The Bank m anages the risks of the REN TA S system ,
benchm arked against the Bank for International
Settlem entsinternationally accepted C ore Principles
for System ically Im portant Paym ent System s, w hich
provides the m inim um standards w hich covers the
legal, financial and operational risks as w ell as
efficiency, access criteria and governance. In this
regard, the Bank has continuously enhanced its
operations and practices to m eet the standards, one of
w hich is ensuring business continuity. In ensuring
paym ent system stability and uninterrupted availability
of the paym ent system s, the Bank operates through
contingency procedures at its disaster recovery centre
(D RC ). Scheduled m onthly live runs are conducted
from the D RC for both the REN TA S and SPIC K system s.
The Bank also m onitors the contingency system s of its
m em ber institutions and encourages them to review
and strengthen their arrangem ents to ensure that their
respective off-site D RC for critical system s are readily
available and operational. M em ber institutions are
required to conduct quarterly testing of their respective
D RC s. In addition, an industry-w ide live run betw een
the m em ber institutionsD RC s and the Banks D RC
w as successfully conducted in June 2005.
Incident Response Plan and Internet Banking
Security Requirement
The establishm ent of the Internet Banking Task Force
(IBTF) by the Bank in O ctober 2004 has led to the
successful form ulation of an Incident Response Plan (IRP)
and the revision of the M inim um G uidelines on the
Provision of Internet Banking Services by Licensed
Banking Institutions. The m em bers of IBTF are from the
Bank, 15 banking institutions, the M alaysian
C om m unications and M ultim edia C om m ission, the
N ational IC T Security and Em ergency Response C entre,
Polis D iraja M alaysia and TM N et Sdn. Bhd. The
establishm ent of IBTF w as in response to the need to pre-
em pt the threat of Internet banking fraud, particularly on
unauthorised fund transfers perpetrated via phishing
scam s. The IRP w hich w as im plem ented on 1 Septem ber
2005, provides a structured and effective process flow for
the banking institutions and relevant authorities to
respond to a critical incident prom ptly. It also facilitates
the sharing of inform ation on Internet banking fraud
related incidences.
Recognising the significance of preserving consum er
confidence in using Internet banking services, w hich is
one of the critical factors in encouraging the use of
electronic channels and paym ents, the Bank w ill issue a
revised M inim um G uidelines on the Provision of
Internet Banking Services by Licensed Banking
Institutionsin 2006. The m ain feature of the revision is
to introduce new authentication requirem ents, together
w ith greater consum er education and protection
m easures. This includes the requirem ent for a tw o-
factor authentication for risky transactions and putting
in place an identity theft detection m echanism .
Completion of the Chip Migration Effort
The m igration exercise for the ATM and credit card
infrastructure led by the Bank together w ith the banking
industry w as com pleted in July 2004 and D ecem ber
2005, respectively. In im plem enting a nation-w ide
m igration exercise, cooperation of the relevant
stakeholders and industry incentive m echanism s have
been im portant in ensuring a coordinated and tim ely
com pletion of the exercise.
In the EM V chip m igration exercise for credit cards, the
banking industry im plem ented a dom estic liability shift
policy on 1 January 2005 and disabled the acceptance of
dom estic m agnetic stripe transactions on 3 M ay 2005. In
the liability shift policy, an institution that is not EM V chip
com pliant w ould bear the liability of any fraudulent
transaction. Follow ing rising credit card fraud incidences at
unattended self-service petrol pum ps, the disablem ent of
the acceptance of m agnetic stripe transactions w as
im plem ented on 31 Decem ber 2004. To avoid fraud
attem pts using m agnetic stripe cards, the banking
institutions ceased to accept fallbacktransactions (using
the m agnetic stripe data during instances w hen a chip is
defective) for dom estic credit card transactions w ith effect
from 31 Decem ber 2005. These m easures have effectively
reduced counterfeit card fraud using inform ation obtained
from m agnetic stripe credit cards.
To com plem ent the chip m igration exercise and prom ote
a safer credit card environm ent, credit card institutions
w ere also required to ensure that credit card
inform ation transm itted over telecom m unication lines
are encrypted to prevent inform ation theft via w ire-
tapping. A s at end-2005, alm ost all acquiring financial
institutions have im plem ented the line encryption
requirem ent.
ENHANCING COMPETITION AND INCREASING
PAYMENT EFFICIENCY
The Bank continues to collaborate w ith the banking
industry to im prove the operational efficiency,
functionalities and service standards in the retail and
w holesale paym ent and settlem ent system s.
Infrastructure enhancem ents in the REN TA S and SPIC K
system s continued to focus on im proving m arket
efficiency and operational cost savings. D uring the year,
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219
Payment and Settlement Systems
several new participants joined the REN TA S and the IBG
system s, w hich contribute to w ider accessibility and
econom ies of scale benefits. Policy changes have been
m ade to further liberalise the paym ent industry, leading
to the greater participation of non-banking institutions.
The Bank continued to facilitate the collaboration of the
local ATM netw ork operator w ith its foreign counterparts
in facilitating cross-border ATM and paym ent services.
Remittance Services and Electronic Money Policies
The Bank is pursuing a tw o-pronged approach to im prove
the rem ittance services in the country, w hich involves
broadening the access to form al rem ittance channels and
encouraging banking institutions to m ake their
rem ittance services m ore accessible, convenient and
cheaper. Tow ards achieving this, the Bank has liberalised
its policy to allow qualified non-banking institutions to
provide rem ittance services and banking institutions to
appoint collecting agents to receive funds from the
rem itters in facilitating their rem ittance transactions.
A part from the liberalised environm ent for rem ittance
services, the Bank has also perm itted m ore non-bank
issuers to enter the electronic m oney m arket. This
augurs w ell w ith the developm ents in sm art card and
m obile telecom m unication technologies and the rising
interest of non-banks in offering electronic m oney
products. These developm ents w ould see greater
m igration to electronic paym ents and contribute
tow ards reducing the cost of doing business in M alaysia.
Interbank GIRO System
The IBG system , w hich is operated by M EPS, facilitates
bulk credit transfers of up to RM 100,000 per
transaction. A n IBG Review Team w as form ed in
N ovem ber 2004 by the Bank, w ith representatives from
the Bank, banking institutions and relevant G overnm ent
agencies tasked to review the IBG services to identify
key challenges and issues that should be resolved in
order to m eet the usersrequirem ents and increase its
usage. The team w as dissolved in A ugust 2005 after
com pleting its tasks. M easures recom m ended by the
team includes standardising the crediting period and
paym ent references, introducing convenient access
points such as ATM s to conduct IBG transactions,
im proving the account validation procedures and to
conduct a concerted aw areness and prom otion
cam paign. M EPS, the ow ner of the system , jointly w ith
the banking institutions, w ill im plem ent these m easures
as w ell as form ulate specific strategies and roadm ap to
further spur the grow th in IBG usage.
Regional ATM Link-up
M EPS established a regional link in July 2005 w ith PT
A rtajasa Pem bayaran Elektronis (A rtajasa), its
counterpart in Indonesia, to facilitate cross-border ATM
cash w ithdraw als in M alaysia and Indonesia. The facility
allow s custom ers of M EPSm em ber banks to w ithdraw
rupiah using their ATM cards at A rtajasa m em ber banks
ATM s in Indonesia. Sim ilarly, custom ers of A rtajasa
m em ber banks are able to w ithdraw cash in ringgit from
ATM s in the M EPSnetw ork. A s at end-2005, the
regional link involved six Indonesian banking institutions
w ith over 300 ATM s in Indonesia and four M alaysian
banking institutions w ith over 2000 ATM s in M alaysia.
The rem aining banking institutions and developm ent
financial institutions in M alaysia are expected to
participate in the regional link on a staggered basis in
2006. M EPS w ill also establish a regional ATM link w ith
the N etw ork for Electronic Transfers (Singapore) Pte. Ltd.
in 2006 to facilitate cross-border ATM cash w ithdraw als
betw een M alaysia and Singapore. The ATM link-up w ill
also pave the w ay for future services such as cross-
border funds transfers via the ATM netw orks.
Cheque Truncation
The SPIC K cheque clearing system rem ains the largest
retail paym ent system in the country. Infrastructure
im provem ents continued to focus on im proving m arket
efficiency and operational cost savings through
autom ation and straight-through processes. Recognising
the strong inertia in cheque usage, the Bank w ill be
im plem enting a cheque truncation system (C TS) aim ed
at reducing transportation and labour costs associated
w ith the physical handling of cheques in the clearing
process. The C TS w ill leverage on the current im aging
infrastructure already in place and w ill provide
opportunities for banking institutions to rationalise their
back office operations to reap cost savings in further
autom ating their cheque processing operations.
Scripless Trading of Commercial Papers in RENTAS
REN TA S, the w holesale paym ent system for real-tim e
funds and scripless securities, continues to function as the
backbone of the countrys paym ent system infrastructure.
The Bank continues to
collaborate with the banking
industry to improve the
operational efficiency,
functionalities and service
standards in the retail and
wholesale payment and
settlement systems.
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220
In enhancing the efficiency of financial m arket
transactions, w ork has continued to prepare for scripless
com m ercial papers (C Ps) to be traded and settled in
REN TA S. Inclusion of C Ps into REN TA S w ill enable trading
and settlem ent of scripless C Ps to be conducted real-tim e
on a delivery versus paym ent basis, thereby im proving
efficiency and elim inating settlem ent risks.
New Members in RENTAS and Interbank GIRO
Systems
In line w ith the Banks revised access policy, three m ore
m ajor financial m arket participants w ere adm itted into
the REN TA S in 2005 increasing its m em bership num ber
to 56. The new m em bers are Bank Sim panan N asional,
Bank Kerjasam a Rakyat M alaysia Berhad and Kum pulan
W ang Sim panan Pekerja. A s for the IBG system , three
locally incorporated foreign banks and one developm ent
financial institution becam e IBG m em bers during the
year, increasing the num ber of IBG participants to 16.
H ow ever, the participation in the IBG system still lags
behind the cheque system , w hich is participated by 30
com m ercial banks. W ith a larger num ber of
participating banking institutions and correspondingly a
w ider coverage of users, econom ies of scale w ould be
realised m uch sooner resulting in the low ering of the
cost of production of paym ent services. In this regard,
the Bank continues to encourage an open access policy
to paym ent system s to facilitate a m ore com prehensive
participation by banking institutions.
MIGRATION TO ELECTRONIC PAYMENTS
Im provem ents in technology, autom ation and straight-
through processes have enabled the cost of electronic
processing of transactions to decline relative to paper-based
processing. Electronic paym ents w hich have a low er variable
cost com ponent com pared to paper-based paym ents, w ill
experience a declining unit cost as the num ber of
transactions increases. In prom oting a country-w ide
understanding the various hindrances and challenges in
adopting electronic paym ents. Such inputs are relevant for
the Banks form ulation of policies and initiatives to prom ote
the w ider use of electronic paym ents.
Governments Adoption of Electronic Payments
The G overnm ents adoption of electronic paym ents
w ould accelerate the adoption of electronic paym ents in
the country. In recent years, the G overnm ent sector had
introduced various electronic delivery channels to
facilitate convenient access for the public to transact
w ith the G overnm ent. In addition, efforts are being
m ade to accept paym ent cards at m ost G overnm ent
paym ent counters to facilitate consum er convenience
and im provem ent in paym ent efficiency. These m easures
w ould pave the w ay for the adoption of electronic
paym ents on a national scale, given that m ost
individuals and businesses have paym ent transactions
w ith the G overnm ent. In this regard, the G overnm ent
has announced its acceptance of paym ent cards in the
2006 Budget. The Bank had engaged the credit card
industry to review the current interchange arrangem ents
to facilitate the acceptance of credit cards in the
G overnm ent sector.
Financial Process Exchange (FPX)
The FPX Steering C om m ittee has facilitated the
adoption of a holistic and pragm atic approach in the
long-term strategy for the FPX. M EPS, as the operator of
the system , has conducted several m erchant sem inars in
building the aw areness on the FPX and its
functionalities. Efforts w ere also m ade by M EPS and the
banking industry to understand and cater for the needs
of the m erchants, apart from revising the pricing of the
FPX services to increase the adoption of the FPX.
Initiatives are being m ade to develop related softw are
solutions that w ould facilitate sm aller m erchants to be
integrated into the FPX paym ent solution at low er costs.
Identifying and Understanding Large Issuers of
Cheques
In Septem ber 2005, the Bank had undertaken a study to
gather profiles of cheque users in M alaysia, w hich
includes identifying reasons for the issuance of large
value cheques. D iscussions w ith several high issuers of
cheque revealed that the m ain reasons for the issuance of
large value cheques w ere due to its w ide acceptance,
convenience and a relatively cheaper paym ent
instrum ent. In ag4ition, several inherent lim itations in the
electronic paym ent system s currently offered have
hindered the adoption of electronic paym ent services,
such as the absence of paym ent reference and
notification, lack of account validation procedures, higher
charges im posed for electronic paym ents, paym ent lim its
Electronic payments which
have a lower variable cost
component compared to
paper based payments, will
experience a declining unit
cost as the number of
transactions increases.
m igration to electronic paym ents, the Bank has continued to
play its role as a catalyst in addressing industry issues and
facilitating industry forum . This includes identifying and
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Payment and Settlement Systems
im posed on electronic paym ents via the ATM and
Internet banking facilities, lim ited participation of banking
institutions com pared to the cheque system and lim ited
infrastructure to facilitate the accessibility of electronic
paym ent services. W hile electronic paym ents have been
m ade available in the m arketplace, additional m easures
and initiatives needs to be undertaken to address these
issues to m ake electronic paym ents m ore prevalent.
Development of the Domestic Debit Card (e-Debit)
W ith the adoption of the chip infrastructure in ATM
cards, m ulti-applications on the sam e card have been
m ade possible. The dom estic debit and M EPS C ash
electronic purse applications are installed in the chip
based ATM card or Bankcard, allow ing the cardholders
to purchase goods and services at m erchant outlets. The
debit application or e-D ebit allow s the cardholders to
charge their purchases directly to their savings or
current accounts w hile the electronic purse facilitates
m icro-paym ent by deducting the electronic m oney that
has been loaded onto the card. Efforts are being m ade
by the industry to prom ote the usage of the dom estic
debit cards. A s at end D ecem ber 2005, about 25,600
card acceptance devices have been deployed by the
acquirers to accept interbank e-D ebit transactions. M ore
e-D ebit term inals are expected to be deployed w ith the
increase in the num ber of acquiring banks in 2006. In
addition, in prom oting the usage of the e-D ebit
application in the Bankcard, a financial institution has
offered a cash backfacility at its m erchant outlets. The
cash backfacility allow s the cardholder to w ithdraw
cash at the m erchant, w hilst m aking paym ent for
purchases using the e-D ebit application.
National Payment Advisory Council (NPAC)
In D ecem ber 2005, the Bank held its yearly N PA C
m eeting. The m eeting w hich w as chaired by the
G overnor, w as attended by representatives from
financial institution associations, industry associations,
related G overnm ent agencies, the dom estic autom ated
clearing house and tw o foreign central bank m em bers.
The annual forum provides a platform for issues relating
to paym ent system s to be raised and deliberated. The
m eeting provides the Bank w ith useful inputs for
consideration in its policy m aking and developm ental
efforts, w hich includes the recent initiatives to set up
the PvP m echanism to m inim ise settlem ent risk of
foreign exchange transactions and the review of the
regulatory fram ew ork for rem ittance business.
In line w ith the prom otion of m igration to electronic
paym ents, the N PA C m eeting deliberated on issues
relating to the Banks role in paym ent system
developm ent, m easures to reduce large value cheques
issued, and strategies to prom ote the dom estic debit
cards to be w idely used in the country. The N PA C
agreed that the Banks role as an overseer and an
operator of paym ent system s should be clearly
segregated w ithin the Bank, and its operational role in
cheque clearing and settlem ent is still necessary at this
stage of developm ent of the financial sector. To reduce
the num ber of high value cheques issued, it w as agreed
that high issuers of large value cheques should be
identified and efforts m ade to encourage them to use
electronic paym ents. The dom estic debit card schem e
has significant potential to be m ore w idely used. M ore
concerted efforts are being taken by M EPS and its
m em ber institutions to increase the deploym ent of
point-of-sale term inals and to prom ote its use am ongst
the debit cardholders.
Payment Systems Forum & Exhibition
The Bank organised the countrys first Paym ent System s
Forum & Exhibition in Novem ber 2005. The forum
provided a platform for the relevant stakeholders including
representatives from financial institutions, paym ent service
providers, G overnm ent agencies, corporations and industry
associations to discuss issues and challenges in m igrating
the country to electronic paym ents. In conjunction w ith the
forum , an exhibition w as held to increase public aw areness
of the various paym ent channels available and to exhibit
paym ent products and innovation.
The inaugural event brought together som e 290
participants com prising users and key players in the
private and public sectors. Tw enty five speakers and
paym ent system experts from a range of countries
shared their experiences, perspectives, as w ell as issues
faced in their m igration to electronic paym ents. The
m igration to cost efficient electronic paym ents is
regarded as a national agenda w ith 2010 being
suggested as a target date for the full im plem entation
of a national electronic paym ent roadm ap. This w ould
require an intensive engagem ent exercise w ith the
various stakeholders in addressing a broad range of
issues such as prom oting public aw areness and
confidence in electronic paym ents, identifying and
resolving current hindrances in electronic paym ent
usage, im proving electronic paym ent services,
establishing paym ent standards, and providing
consum ers w ith incentives to adopt the m ore cost
efficient paym ent m ethods.
MOVING FORWARD
In shaping the paym ent landscape, the Bank w ill continue
to play its role as a driver in leading the country tow ard the
adoption of m ore cost efficient paym ent system s and
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222
instrum ents. In continuing to provide an enabling
environm ent for the adoption of electronic paym ents, the
Banks initiatives and policies for 2006 w ould focus on
enhancing the current electronic paym ent services,
prom oting com petition, transparency and fuller
participation in the electronic paym ent system s, and
rem aining vigilant on any new paym ent fraud trends.
Follow ing the m ore liberalised environm ent for
rem ittance and electronic m oney, a com prehensive
regulatory and supervisory fram ew ork for rem ittance
services and electronic m oney issuance by non-banking
institutions w ill be introduced to put in place prudential
and governance standards for these services. In
addition, m easures w ill be introduced to increase the
aw areness of the readily available rem ittance products
and services w ith the aim of enhancing the use and
accessibility to form al rem ittance channels and to
prevent the potential for any m oney laundering and
other illegal activities. In addition, the Bank w ill w ork
jointly w ith regional C entral Banks to harm onise
paym ent rules betw een jurisdictions to facilitate m ore
efficient cross border paym ents.
To further im prove electronic paym ent services, the Bank
w ill also be review ing paym ent rules and governance of
the m ajor electronic paym ent system s to ensure that a
m inim um service level is uniform ly practised. Paym ent
services, such as the provision of paym ent references
that accom pany paym ents, should be offered by all
banking institutions to provide the public w ith a uniform
and reliable service. The Bank w ill also prom ote
transparency in the service levels of the different
paym ent system s, and the pricing of paym ent services.
W ith increased transparency, users and m erchants
w ould be m ade aw are of the cost of the different
paym ent instrum ents and service level, to help prom ote
greater com petition leading to m ore cost effective and
efficient paym ent services.
The Bank w ill also continue its effort to encourage the
full participation of banking institutions in electronic
paym ent system s sim ilar to the level of participation in
the cheque clearing system . To encourage the use of
electronic paym ents on an industry-w ide basis, the
paym ent service has to have a w ide reach in term s of
participating banking institutions and a w idespread
netw ork of access points for the users to conduct
paym ent transactions conveniently. In line w ith the
developm ental efforts taken to im prove the electronic
paym ents infrastructure, concerted efforts w ill also be
taken to reduce the use of cheques. The Bank w ill be
w orking w ith targeted industries to facilitate their
m igration to electronic paym ents.
In addition, the safety of banking and paym ent services
offered over the Internet and m obile channels w ill be
strengthened to ensure that proper security
arrangem ents and consum er education initiatives are
im plem ented to assure the safety of these services. In its
effort to continuously enhance the consum ers
confidence in using electronic paym ents, the Bank w ill
m onitor the security environm ent of the various
paym ent channels and issue or enhance its guidelines
on fraud m anagem ent w hen the need arises to m itigate
any developing trend of paym ent fraud.
Direct Pricing of Payment Services
International studies that have been done have found
that paper-based instrum ents are m ore costly to operate
than electronic paym ents. D ebit cards in particular, are
less costly com pared to credit card paym ents and cash
w ithdraw als. It w as also found that cash distribution to
the public w as largely financed through substantial cross
subsidies from revenue generated from electronic
paym ent services.
The key driver for consum ers in som e countries that
have successfully m igrated to electronic paym ents has
been through the im plem entation of transparent cost-
based pricing of paym ent transactions. Prices give
signals that help consum ers choose the m ore cost
efficient paym ent services. The incom e from paym ent
services earned by banking institutions in these
countries are largely from fees charged rather than from
cross-subsidisation of services. By adopting cost-based
pricing strategies, banking institutions in these countries
w ere able to reduce their total production cost for
paym ent services and correspondingly increase their
overall profitability, by channelling dem and tow ards less
costly paym ent services. The on-going autom ation of
the paym ent system has resulted in less frequent
traditional bank counter transactions, thus allow ing
banking institutions to focus increasingly on higher
value services and relationship m anagem ent.
In general, the prices of paym ent transactions in
M alaysia does not reflect the cost of production of the
respective paym ent services, and therefore does not
provide the right price signals for consum ers to utilise
the m ore cost efficient paym ent services. Paym ents via
cheques, for exam ple, are inefficient as it incurs a large
variable cost com ponent contributed by labour costs
from the physical handling of cheques, transportation
and the costs for paper and printing of cheques. In
addition to cost savings, electronic paym ents also
provide benefits to consum ers and m erchants w ith
shorter crediting period and certainty of paym ent
com pared to cheque paym ents. M erchants receiving
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Payment and Settlement Systems
electronic paym ents w ould be able to im prove their
operational efficiency by reducing the custom ers
paym ent at the cashiers and also their cash holding,
thereby m inim ising the risk of robbery and losses from
pilferage. To m ove tow ards direct pricing of paym ent
transactions, consum ers should first be provided w ith
an alternative electronic paym ent m ethod that is
affordable and com parable in term s of convenience
and involvem ent of participants as in the cheque
system . This w ould encourage consum ers to use the
relatively low cost electronic paym ent m ethod w hen
cheques are priced higher to reflect their true
processing cost.
PERFORMANCE OF THE PAYMENT SYSTEMS
Overview
N otw ithstanding the paym ent infrastructure
developm ents and enhancem ents m ade in the recent
years, M alaysia rem ains a high user of cash and
cheques w ith its currency-in-circulation (C IC )
accounting for 6.1% of G D P and cheques accounting
for 95.1% of the non-cash paym ent value in 2005.
In term s of the m ajor electronic paym ent m odes, the
usage of IBG and credit cards has been increasing. The
share in value of non-cash paym ent over the past three
years has increased at an average rate of 69.16% and
11.58% for IBG and credit cards respectively. Together,
they account for 4.7% of total non-cash paym ent
value in 2005. In term s of other paym ent cards, the
use of charge cards is declining w ith its share of non-
cash paym ent volum e falling from 1.85% in 2002 to
0.81% in 2005, w hile the debit card has yet to m ake
any significant im pact w ith its share of the non-cash
paym ent value and volum e at 0.02% and 0.25%
respectively. Electronic purse rem ains a popular m icro-
paym ent instrum ent in the transportation sector w ith
an increase in its non-cash paym ent volum e from
18.57% in 2002 to 47.5% in 2005. A s the electronic
purse is used m ainly for sm all value paym ents, it
accounted for only 0.07% of the non-cash paym ent
value in 2005.
In term s of the C IC over G D P ratio, w hich is a proxy to
estim ate the use of cash, M alaysias ratio of 6.1% is
m uch higher than the average ratio of 3.2% in 2004
Table 10.1
Non-Cash Retail Payments in Malaysia
Value (%)
2002 2003 2004 2005
C heques 97.38 96.97 96.32 95.06
Interbank G IRO (credit transfer) 0.38 0.57 1.00 1.84
C redit cards 2.06 2.26 2.48 2.86
C harge cards 0.15 0.15 0.14 0.15
D ebit cards 0.01 0.01 0.01 0.02
E-purse - Toll paym ents 0.02 0.04 0.05 0.07
E-purse - Retail 0.00* 0.00* 0.00* 0.00*
N ote: * negligible
Table 10.2
Non-Cash Retail Payments in Malaysia
Volume (%)
2002 2003 2004 2005
C heques 47.74 35.89 30.53 26.05
Interbank G IRO (credit transfer) 0.15 0.24 0.57 1.35
C redit cards 31.44 26.90 25.09 24.04
C harge cards 1.85 1.37 1.00 0.81
D ebit cards 0.25 0.22 0.21 0.25
E-purse - Toll paym ents 18.57 35.38 42.59 47.50
E-purse - Retail 0.00* 0.00* 0.01 0.00*
N ote: * negligible
C10_Payment System pg216-228 3/14/06, 9:18 PM 223
224
0
5
10
15
20
2001 2002 2003 2004 2005
0.0
0.5
1.0
1.5
2.0
Graph 10.1
RENTAS - IFTS Turnover
Volum e (m illion)
IFTS Volum e IFTS Value
Value (RM trillion)
2001 2002 2003 2004 2005
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
0
20
40
60
80
100
120
140
160
180
Graph 10.2
RENTAS - SSTS Turnover
Volum e ('000) Value (RM trillion)
SSTS Volum e SSTS Value
Table 10.3
Benchmarking with Other Countries
2004
N etherlands N orw ay Sw eden A verage
(16.3m ) (4.6m ) (9.0m )
C urrency-in-circulation/G D P 2.1
1
2.7 4.7 3.2 6.1
N um ber of cheques transactions per
inhabitant (credit transfer) 0.0 0.3 0.2
2
0.2 7.6
N um ber of G iro transactions per
inhabitant (credit transfer) 77.5 95.5 51.4 74.8 0.4
N um ber of point-of-sale term inals per
thousand inhabitants 12 21 14 16 3
Num ber of ATM s per m illion inhabitants 484 473 315 424 223
N ote:
1
Figure as at 2001
2
Figure as at 2002
Source:C PSS-Red Book Statistical U pdate D ecem ber 2005, N orges Bank A nnual Report on Paym ent System s 2004 and Bank N egara M alaysia
2005
Malaysia
(26.38m)
C ountries
(population)
for the N etherlands, N orw ay and Sw eden, w hich are
high users of electronic paym ents. The average num bers
of G iro and cheque transactions per inhabitant in 2004
in the three selected European countries w ere 74.8 and
0.2, respectively, w hile M alaysia recorded an inverse
ratio of 0.4 and 7.6 respectively in 2005.
W hile M alaysia has progressively introduced electronic
paym ent system s to facilitate the m igration to
electronic paym ents, further m easures need to be
im plem ented to increase the accessibility to these
paym ent services such as a w ider deploym ent point-of-
sale term inals for paym ent cards and enabling its ATM s
for interbank funds transfer services. The average
num ber of point-of-sale term inals per thousand
inhabitants recorded in the selected European
countries in 2004 w as 16, com pared w ith only three in
M alaysia in 2005. In term s of ATM s, the average
num ber of ATM s in the selected European countries
per m illion inhabitants w as 424 in 2004, com pared to
M alaysias 223 ATM s in 2005.
Payment Systems and Instruments, and Delivery
Channels
RENTAS
The value and volum e of REN TA S transaction has been
increasing over the past five years. In 2005, the
REN TA S system settled 2.05 m illion transactions
am ounting to RM 19.3 trillion, an increase of 6.8% and
8.1 % in term s of volum e and value of transactions
respectively. The Interbank Funds Transfer System (IFTS)
recorded an increase of 5.4% and 6.4% , in term s of
volum e and value respectively, w hile transactions
through the Scripless Securities Trading System (SSTS)
increased by 27.6% and 29.5% respectively.
In line w ith the Banks revised access policy, m ajor
financial m arket participants adm itted into the REN TA S
in 2005 w ere Bank Sim panan N asional, Bank Kerjasam a
C10_Payment System pg216-228 3/14/06, 9:18 PM 224
225
Payment and Settlement Systems
170
174
178
182
186
2002 2003 2004 2005
1.00
1.05
1.10
1.15
1.20
1.25
Volum e (m illion) Value (RM trillion)
Graph 10.3
Volume and Value of Cheque Transactions
Volum e Value
Rakyat M alaysia Berhad and Kum pulan W ang Sim panan
Pekerja. A s at D ecem ber 2005, there are 56 REN TA S
m em bers, com prising Bank N egara M alaysia, 23
com m ercial banks, six Islam ic banks, ten m erchant
banks, seven discount houses, tw o developm ent
financial institutions, tw o finance com panies, three
universal brokers, C agam as Berhad and Kum pulan
W ang Sim panan Pekerja.
Sistem Penjelasan Imej Cek Kebangsaan (SPICK)
C heques rem ain the m ost w idely used non-cash
paym ent instrum ent accounting for 95.1% of the non-
cash paym ent value in 2005, and has recorded increases
in volum e and value since 2002. Volum e of cheques
processed through the SPIC K cheque clearing centres
increased m arginally by 0.4% from 183.8 m illion
cheques valued at RM 1.227 trillion in 2004 to 184.4
m illion cheques valued at RM 1.235 trillion in 2005. This
reflects the w idespread cheque usage is in the
M alaysian econom y.
Interbank GIRO System (IBG)
Since its im plem entation, IBG continues to record an
increase in transactions from 124,000 transactions
valued at RM 1.08 billion in 2001 to 10.4 m illion
transactions valued at RM 26.3 billion in 2005. Increase
in IBG transactions is attributed m ainly to the
recruitm ent of corporate users by banking institutions
and the increase in the G overnm ents paym ent via
electronic channels. N evertheless, the IBG transactions
w hich accounts for 1.9% of the cheque paym ent value
in 2005, needs to increase m uch m ore significantly to
be a m ajor retail paym ent system .
Financial Process Exchange (FPX)
Since the pilot launch of the FPX in O ctober 2004, m ore
banking institutions and m erchants have joined the
system , bringing the total num ber of participants to six
and 16, respectively. Tw o m ore banking institutions and
several m erchants are in the final stages of preparation to
link to the FPX and are planning to com e onboard by the
first quarter of 2006. A s at the end of 2005, the FPX
recorded a total of 686 transactions am ounting to
RM 16.8 m illion since its debut in 2004. Paym ent
transactions m ade via the FPX are m ainly for businesses,
w hich are term ed as B2B transactions, and from
consum ers to businesses or C 2B transactions for online
purchases. The introduction of FPX brings about greater
convenience and efficiency as it enables both individuals
and corporate users to m ake paym ents electronically
from the banking institution of their choice. To optim ise
the potential of the system , w ider participation is needed
to have an enlarged com m unity of online participants.
Payment Cards
C redit cards rem ain the m ost popular paym ent card in
M alaysia w ith transaction value of RM 40.9 billion in
2005 and had recorded an average annual grow th in
transaction volum e and value of 13.3% and 17.4% per
annum respectively during the recent three years. W hile
the credit card offers a revolving credit line to the
cardholders, on average about 60% of the total value of
credit card transactions are repaid in full, indicating that
a m ajority of the cardholders are using the cards as a
convenient m eans in m aking paym ent. W ith the
grow ing popularity of credit cards, the num ber of
charge cards in circulation had declined at an average
rate of 10.9% and its transaction volum e has fallen at a
rate of 5.8% over the sam e period. For debit cards, it
has a sizeable card base of 14.3 m illion, com prising
m ainly the e-D ebit application that has been
incorporated into 12 m illion chip ATM cards and 2.3
m illion international brand debit cards. A lthough debit
card transactions had increased at an annual rate of
24.6% and 49.8% per annum in term s of volum e and
2001 2002 2003 2004 2005
0
5
10
15
20
25
30
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Graph 10.4
Volume and Value of IBG Transactions
Volum e (m illion) Value (RM billion)
Volum e Value
C10_Payment System pg216-228 3/14/06, 9:18 PM 225
226
value, it rem ains insignificant com pared to credit cards.
The tw o m ain electronic purse schem es are the M EPS
C ash schem e, a contact electronic purse w hich is used
in the retail sector and the Touch n G o schem e, a
contactless electronic purse w hich is used in the
transportation sector. A s in m ost countriesexperience,
electronic purse usage in the retail sector has been low
w hile it represents a popular paym ent instrum ent in the
transportation sector.
Mobile Banking and Payment Services
Broader usage of m obile phones has encouraged the
acceptance and grow th of the m obile banking and
m obile paym ent services in the country. C urrently, five
banking institutions offer banking services using Short
M essaging Services (SM S) via m obile phones, w here the
range of services include ow n account funds transfer,
bill and loan paym ents, m obile prepaid airtim e reload
and balance inquiries. In facilitating m obile paym ents,
banking institutions are partnering w ith third party
service providers to allow subscribers to purchase goods
and services or m ake paym ents using their m obile
phones by either charging the am ount to their credit
cards, or debiting their savings or current accounts. A
total of 391,773 transactions w ere conducted during
the year w ith an aggregate value of RM 4.4 m illion,
m ainly for bill paym ents and ow n account funds
transfer transactions. The num ber of m obile banking
subscribers has m ore than quadrupled to 127,566 as at
the end of 2005 as com pared to 25,734 as at the end
of 2004. This w as contributed by the new m obile
banking or paym ent offerings during the year, apart
from the large num ber of m obile phone users of 19.5
m illion as at the end of 2005.
Internet Banking
Internet banking services provided by 14 banking
institutions continue to provide convenience and low -
cost accessibility to banking services especially in m aking
funds transfer, bill and loan paym ents, reloading m obile
prepaid airtim e and account balance and other inquiries.
N ew services available through this channel include
online share application service for initial public offering
on Bursa M alaysia. The Internet banking channel is
becom ing increasingly m ore popular and its subscribers
have doubled in the recent tw o years, w ith a total of 2.6
m illion subscribers or 70.4% of the Internet subscribers in
the country as at D ecem ber 2005. In addition, the annual
value of online banking transactions has also grow n by
69.6% from RM 11 billion in 2004 to RM 18.6 billion in
2005. The grow th is largely contributed by the rise in
using the channel for third party and ow n account funds
transfers and paym ent of credit card balances.
Shared ATM Services
A s at end-2005 there w ere 5,871 ATM s in M alaysia, of
w hich, 5,490 ATM s belonging to 12 dom estic banks
Table 10.4
Payment Card Transactions
2003 2004 2005
N um ber of Value Volum e N um ber of Value Volum e N um ber of Value Volum e
cards (RM m il) (m il) cards (RM m il) (m il) cards (RM m il) (m il)
C redit cards 5.10 29,359.9 146.3 6.58 34,874.3 164.5 7.84 40,892.5 184.5
C harge cards 0.31 1,895.7 7.5 0.28 2,037.6 6.6 0.24 2,074.8 6.2
D ebit cards 3.15 87.4 1.2 7.71 143.1 1.4 14.32
1
240.1 1.9
Electronic purse -
toll 2.98 566.3 192.4 4.23 733.7 279.3 5.66 972.1 364.5
Electronic purse -
retail 10.47 0.1 0.02 21.13 0.3 0.09 30.27 0.10 0.02
1
Figure includes Bank Sim panan N asional
2002 2003 2004 2005
4.2%
7.0% 7.8%
9.8%
62.4%
39.6%
61.2%
70.4%
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
N o. of Internet banking subscribers (m il)
N o. of Internet subscribers (m il)
Penetration of IB subs. to population (% )
Penetration of IB subs. to Internet subs. (% )
Graph 10.5
Internet Banking Growth and Penetration
N o. of subscribers (m illion) %
C10_Payment System pg216-228 3/14/06, 9:18 PM 226
227
Payment and Settlement Systems
and three developm ent financial institutions are inter-
connected via the M EPSATM sw itch. A s at end 2005,
approxim ately 15.1 m illion chip based ATM cards
issued by the participating m em ber banks in the
shared ATM netw ork. The netw ork facilitates
infrastructure cost savings for individual financial
institutions w hile providing consum ers w ith w ider
access to ATM services through an expanded pool of
ATM s. ATM services provide a num ber of other
functionalities such as balance inquiry, intra-bank
funds transfer, bills paym ent, shares application and
reloading of electronic purse applications. H ow ever,
cash dispensing rem ains the m ost popular transaction
am ounting to RM 156.5 billion or 99.8% of the
financial transactions conducted at ATM s in 2005.
M EPS and the financial institutions are planning to
introduce interbank funds transfer and other paym ent
functionalities such as reloading of prepaid m obile
phones in the near future. M eanw hile, the regional
cross-border link betw een M EPS and A rtajasa in
Indonesia recorded a total transaction volum e and
value of 376 and RM 0.13 m illion respectively in the six
m onths of operations in 2005.
C10_Payment System pg216-228 3/14/06, 9:18 PM 227
C10_Payment System pg216-228 3/14/06, 9:18 PM 229
External Relations
Econom ic Surveillance
M ultilateral Relations
Financial Services N egotiations
Islam ic Banking
C om bating M oney Laundering and Terrorism Financing
Econom ic and Financial C o-operation
White Box:Key International Events Hosted by
Bank Negara Malaysia in 2005
230
230-231
231-233
233
233-235
235-238
238-240
230
In 2005, Bank N egara M alaysia continued to strengthen
its external relations, both at the international and
regional levels to foster closer financial co-operation. A t
the regional level, w hile econom ic surveillance processes
rem ained an integral elem ent of the international
agenda, significant steps w ere taken to enhance
econom ic and financial co-operation. These efforts w ere
focused at strengthening institutional and infrastructure
developm ent, and capacity building in Islam ic financial
services, bond m arket and financing arrangem ents.
Initiatives w ere also taken to enhance bilateral relations
and com bating of m oney laundering and terrorism
financing. Enhancing regional co-operation in these areas
form the foundations for realising the potential that
greater regional econom ic and financial integration
w ould bring to the region. A t the m ultilateral front, calls
w ere m ade for the International M onetary Fund (IM F)
and the W orld Bank (W B) to address the leadership issue
and governance structure, and the need for quota review
that adequately reflects the econom ic contribution and
voice of the A sian countries in the international financial
system .
Economic Surveillance
Bank N egara M alaysia participated actively in the
econom ic surveillance processes of various m ultilateral
and regional fora during the year. A t the m ultilateral
fora, surveillance issues w ere deliberated at the
m eetings of the IM F, W B and the Bank for International
Settlem ents (BIS). Policy deliberations w ere focused on
the role of respective regions in ensuring orderly
resolution of global im balances and in m anaging the
potential risks of high oil prices. It w as recognised that
all m em ber countries w ere collectively responsible to
ensure a stable and m ore balanced global econom ic
grow th. The IM F and the W B w ould play crucial roles in
enhancing the coherence and consistency of the
international m onetary, financial, and trading system s,
and in fostering international co-operation to address
econom ic challenges.
A t the regional level, the Bank also participated in
various initiatives to develop effective regional
surveillance capabilities that com plem ented those
undertaken by the international financial institutions.
Econom ic surveillance undertaken at the regional level
included those covered by the ExecutivesM eeting of
the East A sia-Pacific C entral Banks (EM EA P), South-East
A sian C entral Banks (SEA C EN ), the A ssociation of
Southeast A sian N ations (A SEA N ), A SEA N plus the
Peoples Republic of C hina (PR C hina), Japan and Korea
(A SEA N +3), and the A sia-Pacific Econom ic C o-operation
(A PEC ). A m ong these initiatives included the
enhancem ent and integration of the A SEA N +3 econom ic
surveillance m echanism into the C hiang M ai Initiative
(C M I) fram ew ork. This w ould enable early detection of
irregularities and sw ift rem edial policy actions, and to
facilitate the activation of bilateral sw ap arrangem ents
(BSA s) under the C M I, w hile at the sam e tim e avoiding
the em ergence of any m oral hazard issues.
A nother area of priority is the m onitoring of cross-
border flow s. Through the SEA C EN Expert G roup (SEG )
on C apital Flow s, the Bank participated in the exchange
of inform ation on capital flow s am ong the SEA C EN
m em bers. D uring the Fifth M eeting of SEG on C apital
Flow s that w as held in M arch 2005 in Kuala Lum pur, a
discussion w as held on the developm ent of a regional
early w arning system m odel for capital flow reversals,
w ith the aim of adopting the m odel as an additional
tool for data analysis w ork by the SEA C EN C entre. The
establishm ent of an early w arning system in 2006
w ould further augm ent the m onitoring activities, w hich
w ould lay a key step forw ard in better assessm ent of
regional capital flow s developm ents.
Through the EM EA P and the SEA C EN fora, the Bank
continued its active participation to discuss econom ic
surveillance issues, initiatives for capacity building and
training of central bankers. H igh on the agenda w as the
fram ew ork for financial stability, in light of the volatile
and large capital flow s, financial liberalisation and
increasing integration w ith global m arkets. A nother
priority area w as the developm ent of the financial
sector, notably the im plem entation and im pact of the
new Basel II capital adequacy fram ew ork. This needed
to be reinforced w ith the strengthening of the capacities
of both the central banks and com m ercial banks in
order to effectively im plem ent Basel II. In light of this,
the SEA C EN C entre w ould have an im portant role in
providing training to facilitate the im plem entation of
Basel II.
Multilateral Relations
D uring the year, Bank N egara M alaysia continued to
press forw ard the need for the IM F and the W B to
reflect their representation of all m em ber countries.
A m ong the issues reiterated by M alaysia at the
Septem ber 2005 IM F/W B A nnual M eetings included the
need for greater voice and participation of em erging
and developing countries at the IM F and the W B,
com m ensurate w ith their relative strength in the
External Relations
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 230
231
External Relations
changing global econom y. M alaysia highlighted that the
em phasis of the IM F and the W B to focus on reform s at
the country and regional levels m ust also be
accom panied by reform s on the international front.
C onsequently, the ability to provide leadership
adequately, balancing the interest of the developed and
developing countries on the global stage w ould
determ ine the effectiveness and relevance of the
international financial institutions. A t the sam e tim e, the
IM F surveillance efforts should also include initiatives
that w ill enhance the institutional capacity of
developing econom ies in m anaging risks and
vulnerabilities w hile sustaining their ow n capacity to
support grow th and developm ent. The im portance for
enhancem ent of developm ent partnership and financing
to achieve the M illenium D evelopm ent G oals (M D G s)
w as further em phasised.
Tow ard this end, M alaysia, as a contributor to the IM Fs
Poverty Reduction and G row th Facility Trust, supported
the proposals needed to launch the M ultilateral D ebt
Relief Initiative (M D RI) and the Exogenous Shocks Facility
of the IM F. The objective of the M D RI is to assist in debt
relief for qualified low -incom e m em bers of the IM F
thereby assisting them in reaching the M D G s, w hile the
Exogenous Shocks Facility w ould allow the IM F to provide
tim ely financial assistance to low -incom e m em bers that
have been adversely affected by exogenous shocks.
M alaysia continues to m aintain its net creditor status in
the IM F. D uring the year, M alaysia continued to be
included in the IM Fs Financial Transaction Plan (FTP) for
the quarterly period up to February 2006. U nder the
FTP, selected IM F m em bers (47 to date) w ith strong
balance of paym ents and reserve positions m ay be
called upon to provide foreign exchange resources to
support the IM Fs financial operations. M alaysia resum ed
the IM Fs FTP status since Septem ber 2002, after a
period from 1997.
In N ovem ber, the IM Fs A rticle IV M ission visited
M alaysia to discuss and assess M alaysias
m acroeconom ic perform ance and policy issues for 2005
and outlook for 2006. Their assessm ent w as that
M alaysias resilience to shocks has continued to im prove.
Reference w as m ade to the pragm atic approach
adopted by the M alaysian authorities in m acroeconom ic
policym aking and the steady progress in the
im plem entation of structural reform s.
D uring the year, the Bank also participated actively in
m eetings organised by the BIS. Key issues discussed at
the m eetings included the design and operation of
m onetary policy decision-m aking, central bank co-
operation in the A sia-Pacific region, supervision of
financial activities, issues relating to the global
im balances and sharp increases in oil prices, and
im plications of household indebtedness. D uring the
year, the Bank purchased 220 shares out of 35,933
additional shares offered for sale in January 2005 by the
BIS to existing shareholders. W ith the subscription, the
Banks shareholding in the BIS increased to 3,220 shares
to account for 0.6% of the increased BIS capital.
Bank N egara M alaysia also progressed forw ard its
collaboration w ith the Islam ic D evelopm ent Bank (ID B)
under the am bit of the M em orandum of U nderstanding
(M oU ) signed betw een M alaysia and ID B in June 2004.
Tw o H igh-Level M eetings w ere held during the year to
deliberate on areas of co-operation under the M oU . The
areas of co-operation included strengthening intra-trade
and developm ent of Inform ation C om m unication
Technology (IC T) am ong the O rganisation of Islam ic
C onference (O IC ) m em ber countries. N ew areas of co-
operation continued to be explored by the various
w orking groups and task forces established under the
am bit of the M oU . Significant progress have been
achieved, w ith the signing of a Reinsurance Facility
A greem ent in June 2005 betw een the Islam ic
C orporation for the Insurance of Investm ent and Export
C redit (IC IEC ) and M alaysia Export C redit Insurance
Berhad (M EC IB), aim ed at prom oting and facilitating
m ore trade and investm ent am ong O IC m em ber
countries. In addition, the M alaysian Industrial
D evelopm ent A uthority (M ID A ) signed an M oU w ith the
IC IEC in Septem ber 2005 to cooperate in developing
program m es for prom oting investm ent opportunities in
O IC m em ber countries.
Bank N egara M alaysia is also a m em ber of the ID B
1440H Vision C om m ission. The role of the C om m ission
is to transform the ID B into a prem ier and proactive
developm ent bank w ith w ide know ledge and
com petencies in all its core areas, and to be responsive
to the diverse needs of people in the m em ber and non-
m em ber countries. The C om m ission has scheduled to
launch the ID B 1440H Vision docum ent in Kuala
Lum pur on 23 M arch 2006.
Financial Services Negotiations
World Trade Organisation
Bank N egara M alaysia played an active role in the
services negotiations at the W orld Trade O rganisation
(W TO ) and is the lead agency undertaking negotiations
on trade in financial services. A t the Sixth W TO
M inisterial C onference (6th M C ) held on 13-18
D ecem ber 2005 in H ong Kong, it declared the
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 231
232
establishm ent of procedures to conclude negotiations
under the D oha D evelopm ent A genda in 2006. A m ong
others, these procedures covered the details to
com plete negotiations in agriculture, industrial goods
and services. This included securing a final date of 2013
for the elim ination of all export subsidies in agriculture,
w ith flexibility for longer tim efram e for developing
countries, and providing duty- and quota-free access for
goods exported by 32 least-developed countries.
O n services negotiations, including financial services, the
6th M C agreed that W TO m em ber countries w ould
subm it their final com m itm ents on further m arket
opening by 31 O ctober 2006. It w as agreed that m em ber
countries w ould strive to achieve a progressively higher
level of liberalisation of trade in services, w ith appropriate
flexibility for developing countries, taking into account
factors including the size of their respective econom ies;
level of readiness for liberalisation; and the need to
balance it w ith their dom estic considerations.
The procedures and tim elines agreed to by the 6th M C
w ere expected to intensify negotiations to further
liberalise trade in services at the W TO . This w as in
keeping w ith the W TO s objective to ensure that trade
flow s continued to take place sm oothly, predictably
and as freely as possible. In line w ith the com m itm ent
to gradually liberalise the financial services sector, Bank
N egara M alaysia undertook m easures
1
to accord
greater flexibility for locally-incorporated foreign banks
to establish additional branches, and allow higher
foreign shareholdings in takaful operators, investm ent
banks and Islam ic banks. These m easures are
consistent w ith the overall objective of the Financial
Sector M asterplan (FSM P), w hich is to create an
effective, efficient and dynam ic financial sector that
supports the diversified requirem ents of the econom y.
Regional and Bilateral Free Trade Agreements
The third round of financial services negotiations under the
ASEAN Fram ew ork Agreem ent on Services (AFAS)
concluded w ith the signing of the Protocol to Im plem ent
1
Further details on these m easures can be referred to in C hapter 5: The Banking
System and C hapter 6: The Islam ic Financial System .
Graph 11.1
Foreign Participation in the Malaysian
Commercial Banking Sector
N o. of com m ercial banks %
Total no. of com m ercial banks (including the six Islam ic banks)
N o. of fully foreign-ow ned com m ercial banks
(including one fully foreign-ow ned Islam ic bank)
N o. of dom estically-ow ned com m ercial banks w ith
foreign interest
A verage foreign share (% ) of equity across
dom estically-ow ned com m ercial banks w ith
foreign interest
Foreign share (% ) of total com m ercial bank
assets (com prising share of fully foreign-ow ned
com m ercial banks and other foreigners via equity
participation in dom estically-ow ned com m ercial banks)
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
40
2001 2002 2003 2004 2005
Year
Total no. of insurers
N o. of foreign-ow ned insurers
Foreign share (% ) of general insurance prem ium s (com prising
share of foreigners via equity participation in foreign-ow ned
and dom estically-ow ned insurers)
Foreign share (% ) of life insurance prem ium s (com prising share
of foreigners via equity participation in foreign-ow ned and
dom estically-ow ned insurers)
Graph 11.2
Foreign Participation in the
Malaysian Insurance Industry
N o. of insurers %
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
80
90
2001 2002 2003 2004 2005
Year
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 232
233
External Relations
the Third Package of Com m itm ents on Financial Services
Liberalisationby the ASEAN Finance M inisters at their
m eeting on 6 April 2005 in Vientiane, Laos. The Protocol
put into effect the liberalisation com m itm ents m ade by
ASEAN M em ber Countries under the third round of
negotiations, w hich started in 2002. The com m itm ents
w ent beyond those m ade by the M em ber Countries at the
W TO under the G eneral Agreem ent on Trade in Services
(G ATS), also know n as G ATS-plus com m itm ents. M alaysia
undertook a G ATS-plus com m itm ent in the area of
investm ent advisory services. A fourth round of
negotiations on financial services w as also launched by the
ASEAN Finance M inisters at their m eeting on 6 April 2005.
The round is expected to be concluded w ithin three years.
Bank Negara M alaysia also participated in ongoing services
negotiations, am ong others, under the ASEAN-China Free
Trade Agreem ent (FTA), the M alaysia-Australia FTA and the
M alaysia-New Zealand FTA. M alaysias first bilateral FTA
w as signed w ith Japan on 13 Decem ber 2005, officially
know n as the Japan M alaysia Econom ic Partnership
Agreem ent. The FTA w as com prehensive in nature,
encom passing m easures on liberalisation, co-operation and
trade facilitation in the areas of goods, services and
investm ent. M alaysia and Japan agreed to establish a
W orking G roup on Financial Servicesunder the FTA. The
W orking G roup w ill provide a forum for the financial
regulatory authorities in both countries to exchange view s
on issues of m utual interest related to financial services.
Islamic Banking
A s a founding m em ber and the host for the Islam ic
Financial Services Board (IFSB), Bank N egara M alaysia
continued to participate actively in the IFSB as a m em ber
of the IFSB C ouncil and its Technical C om m ittee. D uring
the year, the IFSB issued tw o prudential standards for
Islam ic financial institutions, nam ely the G uiding
Principles of Risk M anagem ent and C apital A dequacy
Standard. The G uiding Principles of Risk M anagem ent
com plem ented the current risk m anagem ent principles
issued by the Basel C om m ittee on Banking Supervision
and other international standard setting bodies, by
providing a set of guidelines for establishing and
im plem enting effective risk m anagem ent practices in the
Islam ic financial institutions. The C apital A dequacy
Standard addressed the specific approaches in identifying
and m easuring risk of Shariah com pliant products and
services offered by the Islam ic financial institutions that
w ere not specifically addressed by Basel II. The tw o
standards are to be im plem ented w ith effect from 2007.
In 2005, the C ouncil of the IFSB approved the exposure
draft on the C orporate G overnance Standard and
initiated the preparation of tw o new standards on
transparency and m arket discipline, and the supervisory
review process. In addition, the IFSB launched a project
to develop a prudential database of Islam ic financial
services statistics and a study on financial instrum ents
for m onetary m anagem ent, and facilitating and
regulating Islam ic m oney m arket.
D uring the year, the IFSB adm itted the M onetary
A uthority of Singapore as a full m em ber and the Banque
D u Liban as an associate m em ber. A s at end-2005, the
total num ber of IFSB m em bership increased to 84
m em bers (16 full m em bers, seven associate m em bers and
61 observer m em bers) from 65 m em bers as at end-2004.
Combating Money Laundering and Terrorism
Financing
In recent years, the international com m unity has m ade
m uch progress in establishing m echanism s for an
extensive range of international co-operation in
com bating m oney laundering and terrorism financing.
C ountries around the w orld responded to the U nited
N ations C onvention on the Suppression of the Financing
of Terrorism and the nine special recom m endations on
terrorist financing issued by the Financial A ction Task
Force on M oney Laundering (FATF). A ll countries
w elcom ed the positive incentives for the
im plem entation of FATFs recom m endations and A M L/
C FT
2
system s for the benefit of their societies,
businesses and financial sectors.
ASEAN
M alaysia actively participated in the yearly A SEA N
Senior O fficials M eeting on Transnational C rim e
(SO M TC ). A t the 5th A SEA N SO M TC & C onsultations
w ith A ustralia, C hina, Japan, India, Korea and the
U nited States, A SEA N m em ber countries agreed to
prioritise on four areas of transnational crim e, nam ely
terrorism , illicit drug trafficking, trafficking in persons
and m oney laundering. A s the lead shepherdfor
m oney laundering, M alaysia offered to host study visits
to the Financial Intelligence U nit (FIU ) in Bank N egara
M alaysia and the Basic and A dvanced N et W orth
A nalysis W orkshops for A SEA N m em bers under the
A SEA N +3 initiatives.
Asia/Pacific Group on Money Laundering
M alaysia has been a m em ber of the A sia/Pacific G roup
on M oney Laundering (A PG ) since 2000. A t the Eighth
A PG A nnual M eeting in July 2005, M alaysia w as
nom inated as the representative for the South East
A sia region in the A PG Steering G roup for the period
of one year from July 2005. A s a m em ber of the A PG
2
A M L/C FTrefers to A nti-M oney Laundering and C ounter Financing of Terrorism .
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 233
234
Steering G roup, M alaysia has participated in the
deliberations on the structure, functioning and support
for the A PG . M alaysia supported M yanm ars
m em bership in the A PG as this w as in line w ith the
A PG s m andate as a platform for practical and
technical co-operation that w as to be free from
political considerations.
M alaysia also participated in the A PG program m e to
review its dom estic non-profit organisations (N PO )
sector and associated regulations. The N PO review w as
essential to identify w eaknesses that increase the
potential for N PO s to be exploited as m oney
laundering conduits. The review w ould enable risk-
based m easures to be form ulated and established to
deter and detect any exploitation of the N PO s as
conduits for illegal activities. Bank N egara M alaysia is
conducting this review in collaboration w ith the
Registrar of Societies and the C om panies C om m ission
of M alaysia.
M alaysia supported the A PG s application to the FATF
for associate m em bership as this w ould enhance the
opportunity for practical co-operation w ith the FATF on
areas such as research on m oney laundering trends,
technical assistance, and im plem entation guidance at
the international level.
The Egmont Group of Financial Intelligence Units
(Egmont Group)
Bank N egara M alaysia had been a m em ber of the
Egm ont G roup since July 2003. The Egm ont G roup is
an inform al organisation established to stim ulate
international co-operation through inform ation
exchange, training and sharing of expertise. The
exchange of inform ation to and from the other 100
FIU s w orldw ide w as done through the Egm ont Secure
W eb. A ny inform ation provided m ay not be shared
w ith a third party nor be used in an adm inistrative,
investigative, prosecutorial, or judicial purpose w ithout
prior consent of the disclosing FIU .
Cross-Border Co-operation on Exchange of
Information
Pursuant to Section 10 of the A nti-M oney Laundering A ct
2001 (A M LA ), Bank N egara M alaysia is perm itted to
com m unicate any inform ation to a corresponding
authority of a foreign State if an arrangem ent existed
betw een M alaysia and that foreign State. Bank N egara
M alaysia signed an M oU for the exchange of financial
intelligence w ith the A nti-M oney Laundering O ffice of
Thailand in A pril 2005. The M oU w ill facilitate co-
operation for both parties to gather and analyse
inform ation on financial transactions suspected of being
related to m oney laundering, terrorism financing or other
serious crim es to assist in the investigation and
prosecution of persons suspected of those crim es. To
date, Bank N egara M alaysia has concluded sim ilar M oU s
w ith the FIU s of A ustralia, Indonesia and the Philippines.
Bank N egara M alaysia has finalised the negotiation on a
sim ilar M oU w ith the Peoples Bank of C hina and w ill
sign the M oU in 2006. C urrently, Bank N egara M alaysia
is at various stages of negotiations w ith other foreign
counterparts to execute sim ilar M oU s.
Participation in AML/CFT Mutual Evaluation
A s part of our participation in A M L/C FT initiatives,
M alaysia provided a legal expert for the A PG s m utual
evaluation on Brunei in January/February 2005 and a
financial expert in the joint FATF/A PG m utual evaluation
on the U nited States in D ecem ber 2005/January 2006.
Such m utual evaluation assesses the effectiveness of a
countrys A M L/C FT system and its com pliance w ith
international A M L/C FT standards. D ue recognition w as
given w here standards are m et and w here w eaknesses
are identified, appropriate recom m endations are m ade
w ith a view to rectification and im provem ent.
Technical Assistance
M alaysias approach in im plem enting the national A M L/
C FT regim e that took into account dom estic environm ent
is looked upon as a m odel for neighbouring countries.
Bank N egara M alaysia provided technical assistance to
the Lao PD R on the establishm ent of A M L/C FT policy and
procedures for tw o state-ow ned com m ercial banks in
February 2006 under the sponsorship of the A sian
D evelopm ent Bank. This technical assistance w as sim ilar
to the assistance provided in 2004 to the N ational Bank
of C am bodia. Bank N egara M alaysia shared its
experience in the establishm ent of an FIU at the
International Sem inar on M oney Laundering in
The Bank continued to
enhance the AML/CFT regime
by strengthening international
collaborative efforts through
entering into MoUs with
foreign counterparts for
information exchange,
participating in technical
assistance programmes and
playing an active role in
international fora.
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 234
235
External Relations
Islam abad, Pakistan in M arch 2005 and at the IM F
W orkshop in Singapore in N ovem ber 2005. M alaysia also
provided technical expertise at the W Bs Train the
TrainersW orkshop in Bangkok in M ay 2005 and at the
A M L/C FT Sym posium in C hina in Septem ber 2005.
Capacity Building
A s dom estic financial system s becom e internationally
integrated w ith m ore extensive international netw orks, it
requires a m ore sophisticated approach to conduct
surveillance on financial transactions and detecting any
potential illicit financier. It is also im portant to develop the
expertise of personnel involved in investigating m oney
laundering and terrorism financing so as to effectively
deal w ith changes occurring in the international
environm ent. In this regard, M alaysia w ould continue to
enhance its A M L/C FT regim e to ensure that it rem ains
effective in detecting and deterring crim inal activities.
Economic and Financial Co-operation
The collaborative efforts on regional financial co-
operation in the area of short-term liquidity support
in the region and in the further developm ent of
regional bond m arkets gained significant strides in
2005. The Bank participated in various fora to further
prom ote regional econom ic and financial co-
operation, as w ell as collaborated in the form ulation
of general agreem ents on issues of com m on interest
to the region.
The C hiang M ai Initiative (C M I) w hich com prises tw o
com ponents, nam ely the A SEA N Sw ap A rrangem ent
(A SA ) am ong the A SEA N countries and a netw ork of
bilateral sw ap arrangem ents (BSA s) am ong the A SEA N +3
countries m oved forw ard in arrangem ents to enhance
the effectiveness of the C M I to address short-term
regional liquidity difficulties and to com plem ent the
existing international financial facilities. The m easures
included the doubling of the size of the A SA to U SD 2
billion at the prevailing proportions of contributions by
m em ber countries. The decision reflected the strong
m otivation of A SEA N countries to further enhance
regional self-help arrangem ents and signaled the m ove
tow ards greater financing co-operation to address the
increased risks of large speculative global capital flow s.
C onsequently, M alaysias financial com m itm ent doubled
to U SD 300 m illion (see Table 11.1). The new M oU on the
expanded A SA cam e into force on 17 N ovem ber 2005.
In M ay 2005, the A SEA N +3 Finance M inisters agreed
on a set of specific m easures to raise the level of
effectiveness of the BSA netw ork. These com prise
initiatives to integrate and enhance the A SEA N +3
econom ic surveillance into the C M I; clearly-define the
sw ap activation process and adopt a m ore effective
collective decision-m aking m echanism ; increase the
size of bilateral sw aps significantly; and im prove the
m echanism for speedy draw dow ns. The Bank
rem ained actively engaged in the W orking G roup on
the Review of the C M I w hose proposals w ere
endorsed by the Finance M inisters. M alaysia and PR
C hina, w ere also appointed as the lead countries of
the joint study on the possible routes and progressive
steps in m ultilaterising the C M I tow ards a m ore
effective pooling and utilisation of liquidity support
am ong m em ber countries.
The further strengthening of
regional financial cooperation
was reflected in the expansion
of the ASEAN Swap
Arrangement, efforts to
enhance the effectiveness of
the network of bilateral swap
arrangements under the
Chiang Mai Initiative, and an
acceleration in the
development of the Asian
Bond Market Initiative and
the Asian Bond Fund.
Table 11.1
ASEAN Countries Commitments under the
expanded ASEAN Swap Arrangement (ASA)
N ew C om m itm ents
C ountries
w ith increase of A SA % of total size of
size to U SD 2 billion A SA
(U SD m illion)
Brunei 300 15.0
Indonesia 300 15.0
M alaysia 300 15.0
Philippines 300 15.0
Singapore 300 15.0
Thailand 300 15.0
C am bodia 30 1.5
Lao PD R 10 0.5
M yanm ar 40 2.0
Vietnam 120 6.0
Total 2,000 100.0
U nder the C M I, M alaysia has entered into three BSA
agreem ents, nam ely w ith Japan, Korea and PR
C hina. In O ctober 2005, M alaysias BSA agreem ent
w ith Korea w as renew ed for another three years
upon its expiry. C onsonant w ith decisions m ade in
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 235
236
M ay 2005 by the A SEA N +3 Finance M inisters,
bilateral negotiations betw een M alaysia and Korea
resulted in agreem ent on increasing the sw ap size of
the BSA from U SD 1 billion to U SD 1.5 billion. In
addition, the initial draw dow n that could be m ade
w ithout being subject to the IM F conditionality w as
increased from 10% to 20% of the sw ap size. In the
case of the BSA agreem ent betw een M alaysia and
PR C hina, the Bank had entered into negotiations
w ith the Peoples Bank of C hina on renew ing the
agreem ent. The new agreem ent is expected to com e
into effect in 2006. C ollectively, as at end-2005, the
BSA netw ork w hich com prised 16 agreem ents
to four w orking groups in M ay 2005, focusing respectively
on creating new securitised debt instrum ents, credit
guarantees and investm ent m echanism s, foreign exchange
transactions and settlem ent issues, and rating system s. At
the sam e tim e, to facilitate m ore effective coordination for
the Focal G roup on ABM I, an Ad-hoc Support Team and a
Technical Assistance Coordination Team w ere established
in accordance w ith the ABM I Roadm ap endorsed by the
ASEAN+3 Finance M inisters in M ay 2005.
A chievem ents of the w orking groups in 2005 included,
am ongst others, the com pletion of studies on the
setting up of a credit guarantee and investm ent
M alaysia* Indonesia Philippines People's Republic
of C hina
Korea Singapore Thailand
Korea
Japan
Peoples
Republic
of C hina
Bilateral Swap Arrangement Agreements under the Chiang Mai Initiative
as at end-2005
D ates indicate w hen the agreem ents have been signed and the m axim um draw ing am ount for each agreem ent is indicated in parentheses.
1
A one-w ay sw ap arrangem ent w here the requesting country under the agreem ent can request the sw ap-providing country to enter into a sw ap transaction.
2
A tw o-w ay sw ap arrangem ent w here either party could request the other party to enter into a sw ap transaction under the agreem ent.
* M alaysia's three BSA s are of a three-year tenure.
A greem ents signed betw een the Plus Three countries (People's Republic of C hina, Japan and Korea) and A SEA N countries.
A greem ents signed am ong the Plus Three countries.
5 O ctober 2004
1
(U SD 1 billion)
14 O ctober 2005
2
(U SD 1.5 billion)

9 O ctober 2002
1
(U SD 1.5 billion)
Under
negotiation for
renewal
17 O ctober 2005
2
(U SD 1.5 billion)
27 A ugust 2004
1
(U SD 3 billion)

7 M arch 2005
2
(U SD 3 billion)
12 D ecem ber 2005
2
(U SD 1 billion)
6 D ecem ber 2001
1
(U SD 2 billion)
Under negotiation
for renewal
28 M arch 2002
2
(U SD 3 billion)
27 M ay 2005
2
(U SD 4 billion)
27 M ay 2005
2
(U SD 3 billion)
4 July 2001
1
(U SD 2 billion)
31 A ugust 2005
1
(U SD 6 billion)
29 A ugust 2003
1
(U SD 1 billion)
24 D ecem ber 2003
2
(U SD 1 billion)
17 O ctober 2005
1
(U SD 2 billion)
8 N ovem ber 2005
2
(U SD 3 billion
from Japan)
U SD 1 billion
from Singapore)
3
The six w orking groups form ed w ere on N ew Securitised D ebt Instrum ents,
C redit G uarantee and Investm ent M echanism s, Foreign Exchange Transactions
and Settlem ent Issues, Issuance of Bonds D enom inated in Local C urrencies by
M ultilateral D evelopm ent Banks, Foreign G overnm ent A gencies, and A sian
M ultinational C orporations, Rating System s and D issem ination of Inform ation on
A sian Bond M arkets, and Technical A ssistance C o-ordination.
am ong eight A SEA N +3 countries, totalled U SD 58.5
billion, an increase from U SD 36.5 billion at end-
2004.
O n the cooperative efforts to further develop the regional
bond m arkets, advancem ents in prom oting greater and
m ore efficient financial interm ediation w ere m irrored in the
new initiatives to accelerate capital m arket developm ent
w ithin the Asian Bond M arket Initiative (ABM I) under the
ASEAN+3 forum and the Asian Bond Fund (ABF) under the
EM EAP. Under the Asian Bond M arket Initiative (ABM I), the
ASEAN+3 m em ber countries continued to m ake significant
advancem ents in contributing to the developm ent of
deeper and m ore liquid bond m arkets. At the w orking
group level, to enhance efficiency, the initial six w orking
groups
3
that w ere established in 2003 w ere re-organised
m echanism to support issuances of bonds in the region,
treatm ent of w ithholding tax and possible issuance of
regional m ulti-currency bonds. U nder the W orking
G roup on Foreign Exchange Transactions and Settlem ent
Issues, chaired by the Bank, tw o studies w ere
com pleted, nam ely on im pedim ents to cross-border
investm ents and issuance in A sian countries, and on the
possibility of setting up a regional settlem ent linkage to
address gaps w ithin the current settlem ent
arrangem ents for bonds am ongst m em ber countries.
Follow ing the com pletion of the form er, m em ber
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 236
237
External Relations
countries agreed to provide the m inim um relevant
inform ation on the rules and regulations involving cross-
border bond investm ents and issuance. Inform ation
provided by m em ber countries w ould be regularly
updated on the A sian Bonds O nline w ebsite
4
. W ith
regards to the latter study, m em ber countries have
agreed to undertake the second phase of the study in
2006, focusing on reductions of various risks, in
particular foreign exchange settlem ent risks in cross-
border paym ent and settlem ent system s.
M eanw hile, concrete achievem ents by individual
A SEA N +3 m em ber countries included local-currency
bond issuances by the m ultilateral developm ent banks
in M alaysia, Thailand, C hina and the Philippines, and
the introduction of new instrum ents such as the
securitizing of student loans in Korea.
In com plem enting the ABM I, the EM EAP G roup m oved to
im plem ent the second phase of the Asian Bond Fund (ABF2)
initiative, w hich encom passed public participation in the
fund. The ABF2 consists of nine funds, eight of w hich are
single m arket local currency funds investing in sovereign and
quasi-sovereign bonds issued in China, Hong Kong,
Indonesia, Korea, M alaysia, the Philippines, Singapore and
Thailand respectively, w hile the Pan-Asian Bond Index Fund
(PAIF) is a single bond fund investing in a com posite of
sovereign and quasi-sovereign bonds issued in the local
currencies of all the eight EM EAP econom ies. The PAIF,
w hich w as listed in July 2005 in Hong Kong, has grow n by
10.2% since its listing to USD1.1 billion as at end-2005. In
2005, three of the eight single m arket funds w ere
successfully listed on their respective stock exchanges.
These com prised the ABF Hong Kong Bond Index Fund,
ABF M alaysia Bond Index Fund, and ABF Singapore Bond
Index Fund, w hich w ere listed in June, July and August,
respectively.
The listing of the ABF M alaysia Bond Index Fund, the first
Exchange Traded Fund (ETF) in M alaysia, added to the
diversity of listings on the M alaysian Stock Exchange and
also paved the w ay for the increased introduction of other
m ore innovative products. The listing of the ETF also raised
aw areness and generated interest am ong dom estic and
international investors in the M alaysian bond m arket, thus
contributing tow ards the developm ent of a deeper and
broader bond m arket in M alaysia. Since its launch, the low
cost ETF achieved 27% grow th as at end-2005.
During the year, Bank Negara M alaysia continued to
prom ote the Bilateral Paym ents Arrangem ent (BPA) as part
of M alaysias efforts to enhance its trade co-operation w ith
non-traditional m arkets. Bank Negara M alaysia, as the
im plem enting agency for the Palm O il Credit and Paym ents
Arrangem ent (PO CPA) schem e continued to collaborate
w ith the G overnm ent to finance M alaysian palm oil exports
to m arkets w ith potential grow th in their dem and and
usage for oils consum ption. M oving forw ard, Bank Negara
M alaysia w ill continue to enhance the effectiveness of the
BPA schem e and also explore the possibilities of expanding
the num ber of countries, particularly to O IC m em ber
countries. Currently, Bank Negara M alaysia had signed the
BPA w ith 24 countries, of w hich nine are O IC m em ber
countries, w hile five out of the 10 countries benefiting from
the PO CPA schem e are O IC m em ber countries.
4
w w w .asianbondsonline.adb.org
Regional members
spearheaded new initiatives to
transform the SEACEN Centre
into an institution of regional
excellence and choice of
training by central bankers in
this region.
Bank N egara M alaysia continued to accord a high
priority to regional co-operation in hum an capital
m anagem ent to strengthen dom estic capacities in
the financial sector and m acroeconom ic
m anagem ent. In this regard, Bank N egara M alaysia
strongly supported the training activities of the
SEA C EN Research and Training C entre, focusing on
topics relating to core central banking functions,
especially in banking supervision, financial sector
reform and form ulation of m onetary policy. D uring
the year, the SEA C EN C entre extended its training to
22 non-m em bers w hile continuing to provide
training to its m em bers w hich expanded to 14, w ith
the adm ission of the Bank of Papua N ew G uinea in
June 2005. In conducting its training activities, the
C entre collaborated w ith international training
institutes, including the Toronto International
Leadership C entre, the IM F Institute, the Financial
Stability Institute, the W B Institute and the A D B
Institute. A t the sam e tim e, collaboration w as also
established w ith central banks from developed
countries, such as, the Federal Reserve System of the
U nited States and the Bank of Japan. In 2005, for
the first tim e, the C entre collaborated w ith the A PEC
Business A dvisory C ouncil, the A sian Bankers
A ssociation and the Pacific Econom ic C o-operation
C ouncil to conduct the public-private D ialogue on
C ross-Border Im plem entation of Basel II and
Em erging Regulatory Banking Supervisory Issues.
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 237
238
This collaboration w ould be enhanced to bring in
the business perspective into the training conducted
by the C entre.
G iven the challenges facing the C entre in perform ing its
functions in the dynam ic global environm ent, regional
m em bers spearheaded new initiatives to transform the
SEA C EN C entre into an institution of regional excellence
and choice of training by central bankers in this region.
A s a result, a broad strategic direction to guide the
C entre in conducting its training and research activities
w as form alised in 2005. The strategic direction on
training involved developing training m odules and
leveraging on technology, establishing strategic
partnerships as w ell as strengthening the existing
collaboration w ith internationally reputable training
institutions to design and develop high quality training
program m es. A s a start, a flagship course w ould be
developed for different levels of central bank staff and
w ith different degrees of depth and com plexities. This
w ould enable m em ber central banks to select training
activities according to their needs. W ith regard to the
strategic direction on research, the C entre w ould
enhance its research activities, in particular on issues of
regional im portance to central banks, w hich w ere
relevant to and supported the training activities.
A s part of the Banks continued efforts to contribute to
the regions capacity building for long-term grow th, the
Bank organised training and attachm ent program m es, as
w ell as extended assistance in the form of study visits and
briefings to share its experience w ith others. U nder the
M alaysian Technical C o-operation Program m e (M TC P),
the Bank offered places to foreign participants in tw o
annual program m es, nam ely the C entral Banking C ourse
(since 1984) and the Banking Supervision Foundation
C ourse (since 2002). To date, the Bank received a total of
253 foreign participants since the inception of the
courses. In 2005, a total of 19 officials from 14 countries
participated in the training program m es.
Key International Events Hosted by Bank Negara Malaysia in 2005
JUNE 2005
22
nd
Seminar on 10-Year Master Plan for Islamic Financial Services Industry
The ID B and the IFSB, in association w ith Bank N egara M alaysia, jointly organised the Sem inar on 10-Year M aster
Plan for Islam ic Financial Services Industry. It w as held in conjunction w ith the 30
th
A nnuaI M eeting of the ID B
Board of G overnors. The objective of the sem inar w as to discuss key issues and considerations in the form ulation
of a m aster plan for the progressive and structured developm ent of Islam ic banking and finance. The m aster plan
w ould define the blueprint and provide a com m on vision and tem plate, as w ell as the im plem entation steps for
countries in charting the future of the Islam ic financial services industry. The sem inar attracted m ore than 700
delegates com prising regulators, supervisors, m arket players and corporate figures from around the w orld.
22
nd
-23
rd
Investors Conference on Malaysia: An Investment Destination
The Conference w as held in conjunction w ith the 30
th
Annual M eeting of the IDB Board of G overnors. Highlighting
both conventional and Islam ic investm ent opportunities in M alaysia in an environm ent of rapidly changing financial
landscape, financial liberalisation and econom ic transform ation, the Conference received an overw helm ing response,
w ith participants from 100 global institutions from 30 countries. At the close of the conference, tw o indices, nam ely,
the Citigroup M alaysian G overnm ent Securities Index and the Dow Jones-RHB Islam ic M alaysia Index w ere launched,
m arking another m ilestone in the developm ent of the M alaysian capital m arket.
22
nd
-23
rd
Shariah Scholars Dialogue
A closed session dialogue w as organised by Bank N egara M alaysia to discuss the need to foster the
understanding am ong Shariah scholars on Islam ic finance. The dialogue w as attended by m ore than 40 Shariah
scholars, including prom inent scholars from Saudi A rabia, Tunisia, Iran, Bahrain, Pakistan, Bangladesh,
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 238
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External Relations
Indonesia, Brunei and M alaysia. Recognising the vital role of the Shariah scholars in the developm ent of a
progressive Islam ic banking and finance sector and in facilitating its integration w ith the global m arket place, a
RM 200 m illion endow m ent fund w as established by Bank N egara M alaysia to provide the funding needs for
research and developm ent, and hum an capital developm ent in the areas of Shariah and fiqh m uam alat.
24
th
Seminar on Derivatives in Islamic Finance
Bank N egara M alaysia and the Financial M arket A ssociation of M alaysia co-hosted a Sem inar on D erivatives in
Islam ic Financeas part of on-going efforts to accelerate the grow th of Islam ic financial m arkets by strengthening
the linkages of their com ponents. This necessitated the developm ent of a w ider range of Islam ic financial
instrum ents including a tool for hedging or m anaging risk.
The Sem inar w as attended by participants from both local and foreign institutions w ho explored new ideas on
m anaging risks from the Islam ic perspective w ith special focus on the opportunities and challenges faced in
im plem enting Shariah com pliance risk-m itigating techniques such as Islam ic Profit Rate Sw ap and Islam ic Foreign
Exchange Forw ard C ontract. The Sem inar w ould spur the need for greater collaborative efforts am ong regulators,
Shariah scholars, Islam ic financial engineers, researchers and practitioners to convert conceptual ideas into risk
m itigation techniques and products to pave the w ay for a m ore vibrant and dynam ic Islam ic Financial system .
JULY 2005
13
th
-15
th
The Euro Conference
The Euro C onference w as jointly organised by the Bank and the European C om m ission. The high-level
conference, them ed Expanding A SEA N -EU Econom ic Links The Role of the Euro, aim ed to explore
issues in further strengthening A SEA N -EU econom ic relations against the backdrop of the increasing role
of the euro in the international financial system . The C onference provided a platform for an exchange of
view s on financial m arket developm ents and prospects in A SEA N and the EU , econom ic and financial
integration, and the opportunities for increased trade and investm ent linkages betw een the tw o regional
groupings.
O verall, the discussions at the C onference underscored that the bilateral spirit of cooperation betw een A SEA N
and the EU w as intact and grow ing but that there w as a need to strengthen cooperation w ith each other so
that both the regional groupings can reinforce the positive partnership to perpetuate continued shared
prosperity. It w as recognised that the future of A SEA N -EU relations w ould be dependent on the changing
strategic landscape am idst globalisation, A SEA N s and the EU s desire to play a greater role in the global
econom y and international affairs, the EU s ability in m anaging its enlargem ent process, and A SEA N s
com m itm ent to forge greater regional integration.
NOVEMBER 2005
21
st
-23
rd
Regional Conference on Investment Climate and Competitiveness in East Asia
The Regional C onference on Investm ent C lim ate and C om petitiveness in East A sia w as jointly organised by the
Econom ic Planning U nit of M alaysia, the W B and Bank N egara M alaysia in Kuala Lum pur. The objective of the
C onference w as to provide a platform for international experts, private sector representatives, and policy
m akers from the East A sian region to share experiences in designing and im plem enting policies to create a
good investm ent clim ate that w ould lead to better econom ic and social outcom es through im provem ents in
productivity and com petitiveness, resulting in higher grow th and greater w ealth creation.
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 239
240
The C onference, w hich attracted senior officials and private sector participants from 10 countries, nam ely
Brunei, C am bodia, C hina, Indonesia, Laos PD R, M alaysia, M ongolia, Philippines, Thailand and Vietnam ,
discussed the follow ing:
Various form s of investm ent clim ate constraints. These included uncertainties in governm ent policies,
inadequate infrastructure, poor governance, insufficient hum an capital, overly restrictive regulatory
fram ew ork and inadequate access to finance;
Effects of investm ent clim ate constraints on firm perform ance;
Program m es and polices to address the constraints to enhance firm productivity; and
Som e lessons from benchm ark countries.
The C onference created greater aw areness am ong participating countries on new pressures and challenges
from the rapidly changing econom ic and financial environm ent and various approaches that could be taken to
attract investm ent and enhance the grow th potential.
DECEMBER 2005
14
th
-16
th
Third International Forum on Financial Consumer Protection and Education
The Third International Forum on Financial C onsum er Protection and Education hosted by Bank N egara
M alaysia w as them ed Fostering G reater C onsum er Protection and Education. The Forum provided a platform
for financial regulators w orldw ide to discuss em erging issues relating to consum er protection and education as
w ell as to share know ledge and experiences in these areas.
Som e 60 participants from 30 countries, com prising senior officials from regulatory authorities attended the
Forum . The Forum exam ined approaches to prom oting fair m arket practices and equitable treatm ent of
consum ers as w ell as effective product disclosure and transparency standards. The Forum also saw an
exchange of view s on m easuring effectiveness of these approaches and on the future or direction of financial
consum er protection and education. Significant progress w as m ade in fostering closer w orking relationships
am ong regulators and laying the groundw ork for the developm ent of best practice standards on consum er
protection and education issues.
C11 Ext. Relations pg230-241 3/14/06, 9:18 PM 240
Organisation and
Human Resource
O rganisational D evelopm ent
Risk M anagem ent in Bank N egara M alaysia
O rganisation Structure
242-246
247-248
249
242
ORGANISATIONAL DEVELOPMENT
Overview
D uring the year 2005, the Bank m ade further progress
in its efforts to enhance organisational capabilities and
capacity to achieve higher levels of efficiency and
effectiveness in perform ing its roles. Initiatives to
transform the Bank into a know ledge-based
organisation, w hich gained m om entum in 2004, w ere
continued in 2005, w ith m ore deliberate and focussed
program m es and interventions in the areas of hum an
capital m anagem ent, training and learning, inform ation
and com m unications technology, know ledge
m anagem ent, w orkplace and space m anagem ent,
inform ation security, and corporate governance.
Throughout 2005, the organisational developm ent
initiatives in the Bank gave em phasis on tw o priority
areas:
D eveloping a m ore perform ance driven and strategy-
focussed organisation; and
Supporting the developm ent of know ledge w orkers
and inculcating a perform ance-differentiated w ork
culture
The first priority highlights the Banks intent to focus on
perform ance and results. A t the strategic level, the Banks
perform ance m atrix defines four im portant elem ents,
nam ely desired outcom es, stakeholder orientation,
process efficiency, and capability developm ent, all of
w hich are dim ensions of perform ance critical to achieving
the Banks m andate. Like m ost other central banks of
em erging m arket econom ies, the Banks core m andate is
to prom ote and ensure the nations m onetary and
financial stability, in order to support grow th. This
m andate how ever is perform ed in the broader context of
the Banks roles as a regulator, supervisor, environm ental
shaper, driver of change, and as an operator of system s
and establishm ents specially created to m eet the needs of
the econom y.
The Banks leadership guided the organisations strategic
orientation by conducting a series of program m es
during the year, aim ed at establishing greater clarity and
shared vision am ong all internal stakeholders about the
desired outcom es of the Bank. Efforts w ere also directed
tow ard translating strategies into operations, aligning
the organisation, m aking strategy everybodys job, and
m aking strategy form ulation and execution a
continuous process in the Bank.
Organisation and Human Resource
The second priority reflects the challenges faced by
organisations in a know ledge econom y, nam ely how to
attract, develop, retain and m otivate know ledge
w orkers, to drive organisational perform ance. In 2005,
the Bank intensified its efforts in w inning the
com petition for talentby m odernising and enhancing
its policies and practices in talent m anagem ent,
encom passing m ajor review s and reengineering of
processes in talent dem and, talent supply, and
perform ance m anagem ent. The Banks em phasis on a
perform ance-differentiated culture had led to m ajor
changes in the practices to link staff perform ance m ore
directly to organisational perform ance objectives, and to
rew ard and recognition. D uring 2005, the m anagem ent
dem onstrated its com m itm ent tow ards higher
perform ance standards through m ore stringent
evaluation and assessm ent for decisions relating to
rew ards m anagem ent, w hich include prom otion, job
upgrading, salary increm ent and bonus paym ent.
The Bank also continued the im plem entation and
enforcem ent of the policy of continuous, self-directed
learning to further nurture and encourage engaged
learnersw ho are good at linking their learning
objectives to perform ance objectives. Initiatives on new
learning pedagogies and support system s introduced
since 2003 to accom m odate different preferences and
needs of adult learners, helped develop an enabling
environm ent for continuous, life-long learning culture.
The Banks IC T system s continued to be state-of-the-
industry, w ith m ore investm ents m ade during the year to
m eet know ledge w orkersdem and for m ore bandw idth,
internet protocol (IP) enabled solutions, w ireless
technology and m obile telephony. These IC T
enhancem ents gave staff better level of connectivity and
greater flexibility in com m unicating and m aking quicker
decisions, all of w hich are expected to prom ote greater
collaboration, easier access to inform ation, know ledge
sharing, and netw orking am ong stakeholders.
Further enhancem ent in know ledge m anagem ent
practices also supported the needs of know ledge
w orkers in the Bank. The successful com pletion of the
Banks corporate taxonom y project during the year w as
follow ed by a com m itted w ork to develop the Banks
know ledge hub, a system that allow s easy and fast
access to the Banks strategic know ledge assets
repository. The year saw m arked increase in the
utilisation of know ledge m anagem ent center facilities
and services. Better know ledge m anagem ent practices
could contribute to perform ance enhancem ent
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243
Organisation and Human Resource
initiatives by facilitating know ledge acquisition,
know ledge reuse, know ledge sharing and know ledge
creation, by reducing tim e-to-com petence, by
enhancing decision cycle and by facilitating a
collaborative w ork environm ent.
The new office design w hich w as introduced in 2004,
proved popular am ong the know ledge w orkers, partly
because of som e features that m et their preferred w ork
environm ent, thus enhancing their perform ance. The
inform ation security policies and procedures, w hich
w ere im plem ented during the year, provided further
enablers to create an environm ent w here staff shared
know ledge and inform ation w ith confidence. C orporate
governance initiatives during the year gave m ore
em phasis on further refinem ent to existing perform ance
reporting and m onitoring practices, w hich led to
significant changes in the operating departm ents
orientation tow ards accountability, ow nership of results
and outcom es, and greater alignm ent of departm ental
perform ance objectives to Banks strategic objectives.
Strategic Management Process and Capabilities
The Bank had adopted the discipline of the Balanced
Scorecard in 2004 as one of the m eans to enhance its
strategic perform ance m anagem ent practices. In 2005
m ore program m es w ere im plem ented to further harness
the Banks strategic m anagem ent capabilities, by
targeting senior m anagem ent staff particularly
departm ent directors and deputy directors. The top
leadership had conducted sessions w ith these target
groups, and engaged them in high level strategic
conversations to help establish greater clarity, alignm ent
and consensus on the departm ental strategic objectives,
focus and tasks in the context of the Banks
organisational goals. This had also created greater
aw areness of interdependencies and opportunities for
m ore cross-functional collaboration.
The program m es im plem ented in relation to strategic
m anagem ent capabilities and processes include the
articulation of m ore specific strategic results and related
strategies and initiatives, developm ent of perform ance
indicators and establishing a m ore system atic process
for review ing organisational strategies and perform ance.
Inform ation about organisation strategy and
perform ance that takes into account different
dim ensions of perform ance provided insights into the
type of internal capacities and capabilities needed by
the Bank to enhance perform ance. A dedicated unit
the Strategic M anagem ent O ffice - had been set up to
enhance the strategic m anagem ent capability of the
Bank, and assist the Bank in its journey to becom e a
m ore strategy-focussed organisation.
Human Capital Management
The year 2005 saw focussed reassessm ents and
im provem ents of key hum an capital m anagem ent
processes, encom passing m ajor areas including talent
dem and, talent supply, perform ance m anagem ent, staff
developm ent, and rew ards m anagem ent. D uring the
year, a new H um an C apital M anagem ent C om m ittee
w as established to replace the previous H um an
Resource A dm inistration Policy G roup, consistent w ith
the Banks com m itm ent to alleviate hum an capital
m anagem ent issues to the highest level possible, and to
prom ote w idespread and effective inclusion and
participation of senior line staff in the hum an capital
m anagem ent processes. The C om m ittee oversaw the
process to realign talent needs definition of the Bank to
its strategic objectives and core processes, w hich led to
the developm ent and adoption of a new com petency
m odel and roles profiling of departm ental directors in
the Bank.
This w as follow ed by a m ajor exercise to conduct a
com prehensive assessm ent of the current group of
departm ental directors against their new ly designed
jobs. A parallel exercise w as conducted to identify and
m easure the developm ent needs of 70 senior m anagers
in the Bank under the Banks succession m anagem ent
plan, using a com prehensive assessm ent center
approach.
The H um an Resource M anagem ent D epartm ent
underw ent a m ajor transform ation program m e during
the year, focussing on structural redesign, capacity
enhancem ent and enhancem ent of selected core talent
m anagem ent processes. N ew talents w ere brought in to
strengthen the departm ents perform ance and
effectiveness. O ther im portant m ilestones achieved
during the year included: the adoption of a fram ew ork
for the creation of technical specialist laddering in the
Bank to attract and retain the right talents in the
operational areas that im pact the Banks differentiating
capabilities, and the adoption of a m ore reliable set of
tools and m ethodologies to assess and identify the
critical talent needs of the Bank. D uring the year, the
Bank sourced high caliber talents for developm ent
program m es under its scholarship schem e by going
direct to prem ier learning institutions in the country.
Total staff strength at the end of 2005 rem ained
relatively unchanged at 2,345. D uring the year 48 staff
(2% ) resigned w hile another 15 retired. O ver a period of
five years (2000 - 2005), the Banks talent grew by 25%
from 1,876 to 2,345 staff - to lend support to the
Banks increasing range of responsibilities. D uring these
five years, there w as a m arked increase in recruitm ent at
C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 243
244
the executive level (graduate degree holders; at 235 or
25.6% increase), and increase in recruitm ent and
prom otions at m iddle m anagem ent levels (123 or 45%
increase). N on-executive staff represented about 32% of
total staff population. The staff profile of the Bank had
shifted tow ards higher proportion of m iddle
m anagem ent staff and reducing percentage of non-
executive staff. Staff dem ographics also changed, w ith
63% of the staff population now below 40 years old,
w ith a m ore diverse academ ic and professional
background and experience.
O ccupational safety and health continued to be another
area of focus during 2005. The Bank gave em phasis in
prom oting healthy living am ong staff, by increasing the
level of aw areness on personal health and w ell-being,
through a series of educational program m es conducted
by health and m edical professionals. These efforts could
encourage m ore balanced lifestyles for the staff in the
long-run, thus contributing to staff perform ance.
Training and Learning Management
The Bank strengthened its capacity to provide the
services of a C orporate U niversity by 2006. Internal
learning consultants w orked as business partners w ith
line departm ents to define learning program m es that
w ere m ore directly linked w ith the strategic priorities of
the Bank as w ell as learning needs of the individual.
M easures had been taken to form alise action learning,
project-based learning and coaching, w ith the H um an
Resource D evelopm ent C entre collaborating closely w ith
the H um an Resource M anagem ent D epartm ent.
In response to the Banks priority of being a m ore
perform ance driven and know ledge-enabled
organisation, internal capabilities in fields such as
hum an perform ance im provem ent (H PI), evaluation of
learning effectiveness and instructional design w ere
enhanced. The deploym ent of the Learning
M anagem ent System (LM S) and online learning
solutions for m anagem ent and financial courses w ere
additional m ilestones in the transform ation tow ards a
C orporate U niversity. Strategic alliances w ith w orld-
renow ned training providers such as C entre for C reative
Leadership (C C L) and Toronto C entre for Leadership
(TC L) w ere continuously enhanced to provide high
quality learning solutions from thought leaders.
A s part of the Banks effort to develop leaders from
w ithin, the first custom ised Leadership D evelopm ent
Program m e (LD P) for senior m anagem ent, done in
collaboration w ith the C entre for C reative Leadership
(C C L), w as successfully com pleted. The program m e,
w hich spanned over a period of one and a half years,
involved 70 potential leaders w ho w ere involved in
highly engaging interactions w ith senior m anagem ent
for purpose of strategic alignm ent and values
inculcation. The 360-degree assessm ent feedback tool
provided greater self-aw areness in leadership style and
focussed personal developm ent plans. The program m e
w as designed to give opportunities for the participants
to have strategic discourse w ith senior m anagem ent of
the Bank on strategic leadership issues, dialogues w ith
proven industry leaders in the area of leading and
m anaging change, and renow ned academ ics in the
areas of leadership. The Bank also conducted a
leadership program m e on financial supervision for the
Banks supervisors in collaboration w ith the Toronto
C entre for Leadership.
D uring the year 2005, the H um an Resource
D evelopm ent C entre delivered 65 training program m es
com prising of 120 sessions, w ith six training m an-days
per-staff. C ollectively, a total of 65 training program m es
w ere delivered, com prising 20 sessions, w ith the
average training m an-days per-staff registered at 6
training days.
M ore program m es w ill also be offered under the
M alaysia Technical C o-operation Program m e (M TC P) in
2006. In addition to the interm ediate C entral Banking
and Basic Banking Supervision courses, program m es
such as the Islam ic Banking and Finance for C entral
Bankers, the Basic C entral Banking C ourse, and the
Insurance Regulation and Supervision courses w ill be
introduced to enhance the know ledge and expertise of
the respective departm ents. W ith the introduction of
the new courses, w ork is already underw ay to develop
m ore structured curricula in central banking,
inform ation technology for m anagem ent, and
leadership. The curricula w ill be developed based on the
com petency requirem ents identified by the Bank, thus
em phasising the link betw een learning and
perform ance.
Information and Communications Technology
Management
The Bank continues to em phasise on Inform ation &
C om m unication Technology (IC T) as an integral enabling
capability in creating a high perform ance w orkforce.
Specifically, IC T m anagem ent stresses achieving business
efficiency by ensuring tim ely access to the right
inform ation. Tow ards this end, the role of IC T is being
continuously transform ed to im prove integration w ith
business processes.
In this regard, in line w ith the Financial Sector
M asterplan (FSM P) to im prove efficiency of the
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245
Organisation and Human Resource
paym ents infrastructure, the paym ent settlem ent
gatew ay has been m odernised. The Bank had also
enhanced the cheque clearing system to im prove
unpaid item processing at com m ercial banks. A cheque
im age exchange and truncation system is currently
planned for the near future.
The m ajor challenge in 2006 w ill be the
im plem entation of Enterprise Portal, an evolutionary
step of the existing C orporate Portal. This w ill augm ent
the Banks IC T infrastructure capability and further
enhance the delivery of services to stakeholders. The
Enterprise Portal is envisioned to take the Bank to the
next phase of know ledge-based organisation (KBO )
transform ation via a unified and collaborative
w orkplace, w hich integrates people, process and
inform ation.
W ithin the am bit of prom oting collaboration, the Bank
had upgraded the extranet infrastructure to allow
higher flexibility in data exchange betw een the Bank
and the financial institutions. The deploym ent of
m obile devices w ith access to e-m ail has introduced
new opportunities in basic rem ote inform ation
accessibility. This is an initial step to becom e an
extended enterprise by em bracing rem ote
collaboration to reduce tim e-to-decision, ultim ately
enhancing productivity and efficiency.
In line w ith rising expectations, the Bank is obligated
to sustain the provision of secured, resilient and quality
services to its stakeholders. The year m arked a
persistent approach tow ards enhancing the Banks IC T
Infrastructure & Services M anagem ent. Various internal
initiatives, in particular the D ata C entre upgrade, have
been im plem ented to enable m ore prudent IC T
governance through continuous optim isation of roles,
processes and technology environm ents. A reas
im proved include service availability, capacity, security
and continuity m anagem ent. The year ahead presents
new challenges w ith the adoption of Inform ation
Technology Infrastructure Library (ITIL) best practices
and the developm ent of the new offsite D ata C entre,
w hich w ill be m aturing from design to
im plem entation.
Knowledge Management
The strategy of em bedding Know ledge M anagem ent
(KM ) practices into the w ork processes continued in
2005, w hich contributed tow ards the creation of
better enabling environm ent for the know ledge
w orkers in the Bank. A key m ilestone w as the
successful com pletion of the Banks corporate
taxonom y project. The taxonom y is the Banks
inform ation classification fram ew ork that has been
deployed as a foundation to develop a know ledge
repository m anagem ent system referred to as the
Banks Know ledge H ub. Supported by search engines
and inform ation security policies, the Know ledge H ub
serves to enhance know ledge visibility and
accessibility, thus facilitating further the process of
know ledge acquisition, reuse, sharing and creation.
A nother encouraging trend w as the increased
utilisation of the know ledge m anagem ent
infrastructure. For instance, the num ber of w alk-in
users of the Banks Know ledge M anagem ent C entre
(KM C ), w hich w as established in 2004, had increased
92% from 8386 to 16,126. The num ber of subject
specific repositories created in 2005 by the KM C
increased from 32 to 42 (25% ), w hich is partly a
m easure of the grow th in the Banks intellectual
capital. The other notable trend w as the higher
utilisation of the KM C s Library portal by 13% from
31,969 to 35,990, as w ell as increase in user access
to online databases of 10% , from 14,010 to 15,440.
The Bank hosted a Know ledge M anagem ent Fair
during the year to help increase aw areness am ongst
staff about new techniques and practices in
know ledge m anagem ent, as w ell as about the
im portance of inform ation security m anagem ent.
Learning gam es and exhibitions w ere put in place to
show case the m any know ledge m anagem ent
solutions introduced in the Bank. The fair also
brought together som e of the better-know n practices
in know ledge m anagem ent, such as storytelling and
social netw orking through com m unities of practice.
The re-configuration of space w ithin the Bank has
resulted in m ore open and flexible space, including
connectivity to inform ation system s, thus allow ing
staff from different departm ents to m eet for
discussions and w ork under very efficient and
conducive w orking conditions. This has proven to be
valuable for know ledge w orkers w ho w ork in turn as
individuals, as departm ental team s and in cross-
functional projects.
Corporate Governance
D uring the year, the Board of D irectors convened 12
m eetings, apart from its quarterly Board A udit
C om m ittee M eetings. The M anagem ent C om m ittee,
being the focal point and highest m anagem ent
decision-m aking authority in the Bank conducted 38
m eetings to discuss high-level cross-functional m atters.
A dditionally, four Reserve M anagem ent C om m ittee
M eetings, 11 M onetary Policy C om m ittee M eetings,
C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 245
246
four Risk M anagem ent C om m ittee M eetings, 11
Financial Stability C om m ittee M eetings, and three
Paym ent Policy C om m ittee M eetings w ere held in 2005.
D uring the year, a briefing w as conducted for the Prim e
M inister and M inister of Finance to present the Banks
assessm ent of the econom y and financial sector, the
im portant financial and econom ic issues and challenges
confronting M alaysia, and the policy recom m endations
to address these issues and challenges. In response to
the needs of its other stakeholders, including the
general public, the business com m unity, dom estic and
international investors and analysts, the Bank conducted
road show s and aw areness sessions to present the
Banks policies as w ell as to provide inform ation on
banking and insurance m atters.
Awards
H eartiest congratulations from the Bank to the
follow ing staff on being conferred aw ards by their
respective state rulers.
A s part of its internal recognition program m e, the Bank
had recognised 19 staff for their excellent perform ance
and academ ic achievem ent under the Excellent
Perform ance and A cadem ic A chievem ent aw ards. In
addition to individual aw ards, three team s w ere aw arded
w ith Q uality Service, Innovation and Excellent Team
Perform ance Aw ards. The aw ards w ere presented during
the Banks A nnual D inner held on 3 Septem ber 2005.
Retirement
The Board w ishes to place on record its appreciation and
gratitude to the 15 retirees for their dedication and
com m itm ent w hile in service w ith the Bank. The staff
w ho retired from service in 2005 are listed in Table 12.1.
Condolence
The Board extends its condolences to the fam ily of
the late Tan Sri D ato' Seri D r. M ohd. N oordin bin M d.
Sopiee, on his dem ise on 29 D ecem ber 2005. The late
Tan Sri D ato' Seri D r. M ohd. N oordin bin M d. Sopiee
w ho w as the C hairm an and C hief Executive O fficer of
the Institute of Strategic and International Studies
(ISIS) had served as a m em ber of the Bank N egara
M alaysia Board of D irectors since 1995 and had
contributed significantly to the Board deliberations on
the policies of the Bank.
Table 12.1
List of Retirees
No Name Department/Branch
1 Rahim bin Idris Insurance Supervision
2 Indralingam a/l Subram aniam Banking Supervision 1
3 C han Tsoon H ean C urrency M anagem ent and O peration
4 Rosli bin Sulong C urrency M anagem ent and O peration
5 H asnah binti O m ar C orporate Services
6 Yaakop bin Yahaya Paym ent System s
7 Sam sudin bin N a'A m Property and Services
8 H asikin bin Jasm an Property and Services
9 Ism ail bin H ashim IT Services
10 A bdul Latif bin A dlin G overnor's O ffice
11 Khairani bte Rejab Banking Supervision II
12 Rohana binti Yusuf Islam ic Banking and Takaful
13 H elen Jeniffer Bum a Bank Regulation
14 Kunchi Ram an a/l C V Kluva C hary D evelopm ent Finance and Entreprise
15 M oham ed Sapian bin Kam aruddin PPPM Shah A lam
No. Name Award State
1 Puan A zalina binti O m ar Pingat Jasa Kebaktian (PJK) Penang
2 Encik Saari bin Rajap Pingat Jasa Kebaktian (PJK) Pahang
3 Puan A nnie Tan Pingat Khidm at C em erlang M asyarakat (PM C ) N egeri Sem bilan
C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 246
247
Organisation and Human Resource
RISK MANAGEMENT IN BANK NEGARA MALAYSIA
In 2005, the focus of the Risk M anagem ent U nit w as on
the im plem entation of new m ethodologies and
m odified approaches w hich w ere conceived in 2004.
The im plem entation w as successful and w ell received by
the line departm ents w ith m inor operational
adjustm ents to ensure sm ooth im plem entation during
the year. The partnership betw een the Risk
M anagem ent U nit and the line departm ents also
continued to im prove w hich augers w ell in ensuring a
risk culture w hich is consistently em bedded in all aspects
of operational as w ell as strategic efforts.
Risk Management Structure
No changes w ere m ade to the Risk M anagem ent structure
of the Bank and the Risk M anagem ent Com m ittee, at the
apex of the Banks risk m anagem ent governance structure,
continues to be the leading forum for focussed and regular
deliberation on risk issues and the m ain driver of risk
m anagem ent in the Bank. The requirem ents for upw ard
reporting by line departm ents and the Risk M anagem ent
Unit to the Risk M anagem ent Com m ittee rem ained
unchanged so as to enable the Com m ittee to continue to
provide direction for addressing and m anaging potential
risk in the organisation.
Risk Management Practices
In providing the risk m anagem ent oversight, the Risk
M anagem ent C om m ittee determ ines the standards
and requirem ents to ensure that appropriate strategic
and operational risk m anagem ent m easures are
em bedded into all program m es, projects and policy
m aking. In 2005, the C om m ittee continued assessing
the departm entsrisks, controls and em erging risk
issues in their business plans so as to exercise constant
vigilance on the banks overall risk profiles. The
C om m ittee also deliberated w ith the departm ents on
their policy focus, strategic direction and the optim al
approaches to address both existing and potential
risks. To support this, the requirem ent continued to be
for departm ents to m ake a self-assessm ent of the risk
profiles of their operations and assessm ent of the
adequacy of risk m anagem ent through an annual
declaration to M anagem ent. H ow ever, the contents of
the annual declaration carried increased focus on
strategic level risks. The Risk M anagem ent U nit
provided technical support and perform ed its
coordination and oversight role by assisting the
departm ents in their m anagem ent reporting. Em phasis
w as also placed on building greater aw areness on risk
m anagem ent in the Bank through w orkshops to
engage staff and fam iliarise them w ith the risk
m anagem ent m ethodology and practices.
In 2005, the Risk M anagem ent U nit undertook
independent assessm ents on an on going basis to
com plem ent the self-assessm ent exercise done via the
annual declaration. These assessm ents not only bring a
fresh perspective in the identification of m ajor risks in
the departm ents but to also provide assurance to the
Risk M anagem ent C om m ittee that the process had
indeed been rigorous. Further, it covers risks w hich
m ay not be apparent due to fam iliarity w ith the
functions or operations, w hich is a w eakness of all self-
assessm ent approaches. In addition, the Risk
M anagem ent U nit also assessed organisational risk,
that is, w ith em phasis on risks w hich span across
functional lines to address issues arising from
interdependencies w hich could affect the achievem ent
of the strategic aim s and objectives of the Bank. These
results w ere also reported to the Risk M anagem ent
C om m ittee in the course of 2005. The three-pronged
approach, that is, self-assessm ent, independent
assessm ent and organisational risk serves to provide a
m ore holistic view of risks in the Bank. This w ould
serve to enhance organisational alignm ent for the
achievem ent of the Banks strategic results.
Policy Risk
The policy-m aking m echanism in the Bank is designed
w ith the objective of achieving the desired policy
outcom e. There w ere no significant changes to the
fram ew ork to m anage policy risk at the Bank. A s before,
this fram ew ork covers the processes for discussion and
deliberation of all issues related to policy from the
conceptualisation stage through to the developm ent and
im plem entation stages. The high level com m ittees that
preside over policy m aking are the M anagem ent
C om m ittee, the M onetary Policy C om m ittee and the
Financial Stability C om m ittee. C haired by the G overnor,
the com m on objective of these com m ittees is to allow for
and provide a platform for high-level cross-functional
deliberation and consultation to ensure sound policy
decision-m aking and efficacious im plem entation.
A nother com ponent featured in the policy fram ew ork are
the Policy W orking G roups, chaired by A ssistant
G overnors, m em bers com prising directors of all the
relevant departm ents, w hich represent the w orking level
deliberations on the policy issues.
Financial Risk
The M iddle O ffice is responsible for the m anagem ent of
the Banks financial risks arising from the m anagem ent
of international reserves. In the course of regular
operations, the M iddle O ffice w orks closely w ith the
Internal A udit D epartm ent and the Risk M anagem ent
U nit to ensure strict com pliance w ith investm ent
guidelines, policies and operational procedures.
C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 247
248
Financial risk m anagem ent continues to develop in line
w ith developm ents and trends in reserve m anagem ent
activities and the dom estic financial m arket as increased
sophistication and achievem ent in technology in
financial m arkets dictate as such. Throughout the year,
initiatives w ere undertaken to im prove m ethodologies
and enhance system infrastructure in order to support a
m ore robust and com prehensive review of financial
risks. This is reinforced by increased specialisation, m ore
focus on key risk areas and training program m es for key
personnel w hich are aim ed at developing superior
understanding of the com plexities of various
instrum ents, strategies and m ethodologies.
Operational Risk
In m anaging operational risk, the essential elem ents of
ow nership of risks, self-assessm ent, continual review ,
escalation of key risk issues and accountability for
control im provem ent and issue resolution w ere retained.
A t the functional level, the D epartm ent H eads continue
to have direct responsibility for ensuring that risk
m anagem ent practices are integral to daily operations
and that all risks are appropriately addressed.
D epartm ents are thus required to conduct process
analysis and w alkthroughs w hich are essential to review
core processes for operational risks arising from changes
in the w orking environm ent.
Key m easures to address operational risks include the
Internal Audit function w hich plays a crucial role in the
m onitoring of operational risk. Further reductions in
hum an intervention in processing through the use of
com puter system s largely reduce hum an related
operational risks. How ever increased vigilance is now
required in m onitoring system availability and reliability.
Additionally, for increased assurance in m ajor projects, staff
of the Risk M anagem ent Unit participate in the project
team s to ensure the appropriate risks are being m anaged.
Through all this, the ultim ate aim for risk m anagem ent
rem ains the sam e, that is, to ensure that regular
m onitoring takes form to enable pre-em ptive and, if
necessary, prom pt corrective actions in all areas of risk.
Business Continuity Management
The year 2005 w itnessed various Business C ontinuity
M anagem ent enhancem ent efforts being carried out at
the Bank to ensure that the Banks ability to prepare,
respond to and m anage any crisis or unexpected
incidences effectively continues to rem ain sound and
robust. A yearly review of the im pact of any given
disruption to departm ents in the Bank w as conducted
to validate the continued effectiveness of existing crisis
arrangem ents that are in place. A long w ith lessons
learnt from other Business C ontinuity M anagem ent
exercises, as w ell as the required m aintenance for the
Banks back-up facility, the review contributed to the
im plem entation of an exercise to upgrade this alternate
facility. This w as done to ensure that the facility is
continuously updated w ith the required technology to
guarantee its crisis-tim e functionality.
W ithin the Business C ontinuity fram ew ork, there are tw o
high level com ponents, the C risis M anagem ent
C om m ittee and the C risis M anagem ent Team . The C risis
M anagem ent C om m ittee, w hich reports to the G overnor
and is chaired by a designated D eputy G overnor,
sym bolises high level endorsem ent of the Business
C ontinuity program m e in the Bank. The C risis
M anagem ent Team has m em bership com prising directors
from all identified critical departm ents and support
team s.
D uring the year, the Business C ontinuity M anagem ent
unit, responsible for overseeing the Business C ontinuity
M anagem ent function of the Bank, and w hich form s
part of the Risk M anagem ent U nit, drew on the Risk
M anagem ent C om m ittee as a forum for seeking the
ultim ate endorsem ent and direction for Business
C ontinuity M anagem ent exercises conducted. This is in
view of the parallel m em bership betw een the Risk
M anagem ent C om m ittee and C risis M anagem ent
C om m ittee, w hich sits at the apex of the Banks
Business C ontinuity M anagem ent fram ew ork.
D uring the year, an internal Business C ontinuity
M anagem ent w ebsite w as launched to prom ote and
raise overall staff aw areness on the Banks Business
C ontinuity M anagem ent program m e as w ell as to
com m unicate a Business C ontinuity M anagem ent policy
endorsed by M anagem ent. It is envisaged that added
know ledge on the subject m atter w ould help prom ote
and strengthen the involvem ent of all staff in the Banks
Business C ontinuity M anagem ent program m e. This
ultim ately, w ould then translate to the ability of all staff
to spontaneously deliver prom pt and appropriate
calculated responses, crucial in any crisis.
Finally, as in previous years, periodic assessm ents of the
Banks capability to respond to crisis w ere also done.
This w as accom plished via the m echanism s of live-run
exercises, as w ell as the tw ice-yearly C risis M anagem ent
Team m eeting w hich m et to discuss em erging Business
C ontinuity issues, such as the haze that affected the
country in the year. The desired cooperation betw een
the critical departm ents to produce an integrated and
coordinated bank-w ide arrangem ent w as tested in a
sim ulation that w as part of the sam e exercise.
C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 248
249
Organisation and Human Resource
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C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 249
C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 251
C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 251
C12 Organisation & HR pg242-251 3/14/06, 9:19 PM 251
Balance Sheet as at 31 D ecem ber 2005
Annual Accounts
252
C13_Annual Account pg252-262 3/14/06, 9:50 PM 252
253
Annual Accounts
253
CERTIFICATE OF THE AUDITOR GENERAL
ON THE FINANCIAL STATEMENTS OF BANK NEGARA MALAYSIA
FOR THE YEAR ENDED 31 DECEMBER 2005
I have audited the financial statem ents of Bank N egara M alaysia for the year ended 31 D ecem ber 2005. These
financial statem ents are the responsibility of the m anagem ent. M y responsibility is to express an opinion on these
financial statem ents based on m y audit.
2. The audit has been conducted in accordance w ith the A udit A ct 1957 and in accordance w ith approved auditing
standards. Those standards require the audit be planned and perform ed to obtain reasonable assurance w hether the
financial statem ents are free of m aterial m isstatem ent. This audit includes exam ining, on a test basis, evidence
supporting the am ounts and disclosures in the financial statem ents. Evaluation is also m ade on the accounting
principles used and the overall financial statem ents presentation.
3. In m y opinion, the financial statem ents give a true and fair view of the financial position of Bank N egara M alaysia
as at 31 D ecem ber 2005 and of the results of its operations for the year then ended in accordance w ith
approved accounting standards.
(TAN SRI DR. HADENAN BIN A. JALIL)
A U D ITO R G EN ERA L
M A LAYSIA
PU TRA JAYA
15 FEBRU A RY 2006
C13_Annual Account pg252-262 3/14/06, 9:50 PM 253
5 25
256
STATEMENT BY CHAIRMAN
AND ONE OF THE DIRECTORS
W e, Zeti A khtar A ziz and O h Siew N am , being the C hairm an and one of the D irectors of Bank N egara M alaysia, do
hereby state that in the opinion of the Board, the financial statem ents are draw n up so as to give a true and fair view
of the state of affairs of Bank N egara M alaysia as at 31 D ecem ber 2005 and of the results of operations for the year
ended on that date.
O n behalf of the Board, O n behalf of the Board,
ZETI AKHTAR AZIZ OH SIEW NAM
CHAIRMAN DIRECTOR
15 FEBRU A RY 2006 15 FEBRU A RY 2006
KU A LA LU M PU R KU A LA LU M PU R
C13_Annual Account pg252-262 3/14/06, 9:50 PM 254
257
DECLARATION BY THE OFFICER PRIMARILY RESPONSIBLE
FOR THE FINANCIAL MANAGEMENT OF BANK NEGARA MALAYSIA
I, A bdul A ziz A bdul M anaf, being the officer prim arily responsible for the financial m anagem ent of Bank N egara
M alaysia, do solem nly and sincerely declare that the financial statem ents, are to the best of m y know ledge and belief,
correct and I m ake this solem n declaration conscientiously believing the sam e to be true and by virtue of the provisions
of the Statutory D eclarations A ct, 1960.
Subscribed and solem nly declared )
by the abovenam ed at Kuala Lum pur )
this 15 February 2006. )
Before m e,
C13_Annual Account pg252-262 3/14/06, 9:50 PM 255
258
Bank Negara Malaysia
Balance Sheet as at 31 December 2005
2005 2004
RM RM
ASSETS Note
G old and Foreign Exchange 3 264,421,558,175 249,704,108,859
International M onetary Fund Reserve Position 1,186,337,566 3,068,374,430
H oldings of Special D raw ing Rights 748,345,706 765,326,109
M alaysian G overnm ent Papers 4 961,013,021 221,100,747
D eposits w ith Financial Institutions 2,878,873,387 2,887,524,750
Loans and A dvances 5 10,295,735,304 10,637,048,634
O ther A ssets 6 14,940,995,292 17,570,435,602
Total Assets 295,432,858,451 284,853,919,131
LIABILITIES AND CAPITAL
C urrency in C irculation 34,396,746,453 32,353,945,724
D eposits: C om m ercial Banks, Finance C om panies
and M erchant Banks 140,606,624,541 124,709,136,071
Federal G overnm ent 27,273,933,343 25,704,665,762
O thers 7 4,297,159,874 4,884,385,498
Bank N egara Papers 20,347,587,398 16,877,443,819
A llocation of Special D raw ing Rights 8 751,127,007 820,579,258
O ther Liabilities 9 29,551,916,821 27,843,305,494
Total Liabilities 257,225,095,437 233,193,461,626
A uthorised C apital RM 200,000,000
Paid-up C apital 10 100,000,000 100,000,000
G eneral Reserve Fund 11 8,103,080,465 6,742,117,315
O ther Reserves 12 30,004,682,549 44,818,340,190
Total C apital 38,207,763,014 51,660,457,505
Total Liabilities and Capital 295,432,858,451 284,853,919,131
Notes on the following pages form part of these financial statements.
C13_Annual Account pg252-262 3/14/06, 9:51 PM 256
259
Profit and Loss Statement for the Year Ended 31 December 2005
2005 2004
RM RM
Note
Total Income 13 4,989,023,000 3,427,026,087
Less:
Recurring Expenditure 14 809,055,659 504,604,402
D evelopm ent Expenditure 15 619,004,191 145,180,660
Total Expenditure 1,428,059,850 649,785,062
Net Profit 3,560,963,150 2,777,241,025
Profit and Loss Appropriation Statement for the Year Ended 31 December 2005
2005 2004
RM RM
Net Profit 3,560,963,150 2,777,241,025
Transfer to O ther Reserves 16 1,000,000,000 700,000,000
Transfer to G eneral Reserve Fund 1,360,963,150 877,241,025
A m ount Payable to Federal G overnm ent 1,200,000,000 1,200,000,000
3,560,963,150 2,777,241,025
Notes on the following pages form part of these financial statements.
C13_Annual Account pg252-262 3/14/06, 9:51 PM 257
260
Notes To The Financial Statements - 31 December 2005
1. Principal Activities of the Bank
The Banks principal roles and responsibilities are as follow s:
(a) to achieve m onetary stability;
(b) to prom ote a stable financial system ;
(c) to ensure an efficient paym ent system ;
(d) to issue currency in M alaysia; and
(e) to act as a banker and a financial adviser to the Federal G overnm ent.
2. Accounting Policies
(a) Gold, Securities and Investments
G old, securities and investm ents are stated at cost and provisions have been m ade for dim inution in value as
at 31 D ecem ber 2005.
(b) Foreign Currency Translation
A ssets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the
balance sheet date. Transactions in foreign currencies during the year have been translated into ringgit at
rates of exchange ruling on value dates.
The International Reserves com prising G old and Foreign Exchange, International M onetary Fund Reserve
Position and H oldings of Special D raw ing Rights at 31 D ecem ber 2005 w as RM 266,356.2 m illion
equivalent to U SD 70,489.3 m illion.
(c) Repurchase and Reverse-Repurchase Agreements
The am ount borrow ed under repurchase agreem ents is reported under 'O ther Liabilities'. The am ount lent
under reverse-repurchase agreem ents is reported under 'O ther A ssets'. The difference betw een the am ount
received and am ount paid under repurchase and reverse-repurchase agreem ents is recognised as interest
expense and interest incom e on a straight line basis, respectively.
3. Gold and Foreign Exchange
2005 2004
RM RM
Foreign Securities 214,223,340,658 172,451,464,614
Foreign D eposits 30,954,385,954 55,869,780,871
Balances w ith O ther C entral Banks, Bank for
International Settlem ents (BIS) and
International M onetary Fund (IM F) 5,043,988,892 6,307,319,881
O thers 14,199,842,671 15,075,543,493
264,421,558,175 249,704,108,859
4. Malaysian Government Papers
2005 2004
RM RM
M alaysian G overnm ent Securities 961,013,021 221,100,747
C13_Annual Account pg252-262 3/14/06, 9:51 PM 258
261
5. Loans and Advances
Loans and advances com prise m ainly advances extended by the Bank to the participating institutions under
section 30(1) of the C entral Bank of M alaysia A ct 1958.
6. Other Assets
O ther assets include investm ents in shares and bonds of RM 14,421,797,503 acquired under section 30(1)(j) and
section 30(1)(oo)(i) of the C entral Bank of M alaysia A ct 1958 and RM 200 m illion for the establishm ent of Fund
for Shariah Scholars in Islam ic Finance.
7. Deposits - Others
A substantial part of these deposits com prises deposits from Federal Statutory A uthorities.
8. Allocation of Special Drawing Rights
IM F m em ber countries are allocated Special D raw ing Rights (SD R) in proportion to their subscriptions to the IM F.
The allocation represents a dorm ant liability of the Bank to the IM F, against w hich assets are received in SD R from
the IM F. The net cum ulative of the allocation w as RM 751,127,007 equivalent to SD R139,048,000.
9. Other Liabilities
O ther liabilities include m ainly placem ents by licensed banking institutions under repurchase agreem ents and
accounts payables.
10. Paid-up Capital
The entire issued and paid-up capital of RM 100 m illion is ow ned by the G overnm ent of M alaysia.
11. General Reserve Fund
2005 2004
RM RM
A s at 1 January 6,742,117,315 5,864,876,290
Transfer from N et Profit 1,360,963,150 877,241,025
A s at 31 D ecem ber 8,103,080,465 6,742,117,315
12. Other Reserves
O ther reserves com prise the Exchange Rate Fluctuation Reserve and the C ontingency Reserve.
13. Total Income
Total incom e com prises revenue from foreign reserve m anagem ent w hich includes interest and dividend, non-
treasury incom e and is stated at net of am ortisation/accretion of prem ium s/discounts and m onetary policy cost.
14. Recurring Expenditure
Recurring expenditure are expenses incurred in m anaging and adm inistering the day-to-day operations of the
Bank. It includes currency and staff related cost. C urrency related cost arising from the larger volum e of notes
printed and coins m inted contributed significantly to the increased recurring expenditure in 2005.
C13_Annual Account pg252-262 3/14/06, 9:51 PM 259
262 260
15. Development Expenditure
D evelopm ent expenditure are expenses incurred m ainly to finance developm ental and long term projects
undertaken by the Bank in line w ith its strategies, principal roles and responsibilities. The higher developm ent
expenditure in year 2005 w as m ainly due to initial contributions of RM 250 m illion for the establishm ent of BN M
M edical Fund and RM 200 m illion for the establishm ent of IN C EIF Trust Fund to support the role of the
international centre for education in Islam ic finance.
16. Transfer to Other Reserves
This transfer is m ade in accordance w ith Section 7(2) of C entral Bank A ct 1958.
17. Contingent Liabilities
Total contingent liabilities as at 31 D ecem ber 2005 am ounted to RM 7,042,957,192. These com prise:
(a) an am ount of RM 6,977,728,936 w hich represents the obligation of the Bank to pay in full, in SD R or other
convertible currencies, the am ount of M alaysia's quota in the IM F under the A rticles of A greem ent; and
(b) an am ount of RM 65,228,256 w hich represents the uncalled portion of the 3,220 units of shares held by the
Bank in BIS. The am ount is based on the nom inal value (SD R5,000) of the uncalled portion and SD R rate as at
the balance sheet date.
18. Income Tax
The Bank is exem pted from paym ent of incom e tax and supplem entary incom e tax as set out in the Incom e Tax
(Exem ption) (N o. 7) O rder 1989.
C13_Annual Account pg252-262 3/14/06, 9:51 PM 260
262
Annex
Contents
1. Foreign Exchange A dm inistration Policies P1
2. Funds A dm inistered/Funded by Bank N egara M alaysia: Fund U tilisation P10
3. Financial Sector M asterplan P11
4. Licensed Banking Institutions (as at 31 D ecem ber 2005) P16
5. Financial Institutions O ffering Islam ic Banking Services (as at 31 D ecem ber 2005) P18
6. Shariah A dvisory C ouncil M em bers P20
Key Economic and Financial Statistics
Chapter 1: The Malaysian Economy in 2005
A .1 G ross D om estic Product by Kind of Econom ic A ctivity in C onstant 1987 Prices P23
A .2 G row th in M anufacturing Production (2000=100) P24
A .3 Production of Prim ary C om m odities P25
A .4 G N P by D em and A ggregates P26
A .5 Savings-Investm ent G ap P27
A .6 Balance of Paym ents P28
A .7 Principal M arkets for M anufactured Exports P30
A .8 Principal Export M arkets for Electronics P31
A .9 Principal Export M arkets for Electrical Products P31
A .10 Principal Export M arkets for C hem icals and C hem ical Products P32
A .11 Principal Export M arkets for M anufactures of M etal P32
A .12 Principal Export M arkets for O ptical and Scientific Equipm ent P33
A .13 Principal Export M arkets for Petroleum Products P33
A .14 Export Prices of M ajor C om m odities P34
A .15 Principal Export M arkets for Palm O il P34
A .16 Principal Export M arkets for Rubber P35
A .17 Principal Export M arkets for Saw Logs P35
A .18 Principal Export M arkets for Saw n Tim ber P36
A .19 Principal Export M arkets for C rude O il P37
A .20 Principal Export M arkets for LN G P37
A .21 External D ebt and D ebt Servicing P38
A .22 C onsum er Price Index (2000=100) Sub-groups of Food P39
A .23 Producer Price Index (1989=100) P39
A .24 Labour M arket: Selected Indicators P40
A .25 N ew Supply of Purpose-Built O ffice Space and Retail Space in M alaysia P41
A .26 Average M onthly Rentals for Prim e O ffice and Retail Space in the Klang Valley P41
Chapter 2: Monetary and Fiscal Developments
A .27 Broad M oney (M 3) P42
A .28 M oney Supply: A nnual C hange and G row th Rates P43
A .29 Interest Rates (% ) P44
A .30 C onsolidated Public Sector Finance P45
Chapter 3: Outlook and Policy
A .31 M ajor Industrial C ountries: Key Econom ic Indicators P46
A .32 East A sia: Key Econom ic Indicators P47
Annex
Chapter 4: The Financial System
A .33 Sources and U ses of Funds of the Financial System P48
Chapter 5: The Banking System
A .34 C om m ercial Banks: C om m itm ents and C ontingencies P49
A .35 M erchant Banks: C om m itm ents and C ontingencies P50
A .36 C om m ercial Banks: Incom e and Expenditure P51
A .37 M erchant Banks: Incom e and Expenditure P51
A .38 C om m ercial Banks: D irection of Lending P52
A .39 M erchant Banks: D irection of Lending P53
A .40 C om m ercial Banks: N on-perform ing Loans by Sector P54
A .41 M erchant Banks: N on-perform ing Loans by Sector P55
A .42 Banking System : Selected Indicators P56
A .43 Banking System : Key D ata P58
A .44 H ousing C redit Institutions P59
A .45 O utstanding H ousing Loans P60
A .46 A pproved H ousing Loans P60
Chapter 6: The Islamic Financial System
A .47 Islam ic Banking System : Key D ata P61
A .48 Islam ic Banking System : Sources and U ses of Funds P62
A .49 Islam ic Banking System : C om m itm ents and C ontingencies P62
A .50 Islam ic Banking System : Incom e and Expenditure P63
A .51 Islam ic Banking System : Financing A ctivities P64
A .52 Islam ic Banking System : Financing to Sm all and M edium Enterprises P64
A .53 Islam ic Banking System : D irection of Financing P65
A .54 Islam ic Banking System : N on-perform ing Financing by Sector P66
A .55 Islam ic Banking System : D eposits by Type and Institution P67
Chapter 7: Development Financial Institutions
A .56 D evelopm ent Financial Institutions: Sources and U ses of Funds P68
A .57 D evelopm ent Financial Institutions under D FIA : Sources and U ses of Funds P69
A .58 D evelopm ent Financial Institutions: D irection of Lending P70
A .59 D evelopm ent Financial Institutions under D FIA : D irection of Lending P71
A .60 Bank Perusahaan Kecil & Sederhana M alaysia Berhad (SM E Bank) P72
A .61 Export-Im port Bank of M alaysia Berhad P73
A .62 Bank Sim panan N asional P74
A .63 Bank Kerjasam a Rakyat M alaysia Berhad P75
A .64 Bank Pem bangunan M alaysia Berhad P76
A .65 Bank Pertanian M alaysia P77
A .66 O ther D evelopm ent Financial Institutions: C ore A ctivities P78
A .67 D evelopm ent Financial Institutions: Selected D ata P79
A .68a D evelopm ent Financial Institutions: G overnm ent Special Funds P80
A .68b D evelopm ent Financial Institutions: G overnm ent Special Funds P81
A .69a D evelopm ent Financial Institutions: Bank N egara M alaysia Funds P82
A .69b D evelopm ent Financial Institutions: Bank N egara M alaysia Funds P83
A .70a D evelopm ent Financial Institutions: Funds from M ultilateral and International A gencies P84
A .70b D evelopm ent Financial Institutions: Funds from M ultilateral and International A gencies P85
Chapter 8: Other Financial Institutions
A .71 Leasing C om panies: Sources and U ses of Funds P86
A .72 Leasing C om panies: Incom e and Expenditure P87
A .73 Leasing C om panies: Financing by Sector P87
A .74 Factoring C om panies: Sources and U ses of Funds P88
A .75 Factoring C om panies: Incom e and Expenditure P88
A .76 Factoring C om panies: Financing by Sector P89
Chapter 9: Financial Markets
A .77 C apital M arket D ebt Securities: A m ount O utstanding P90
Annex
P1
Foreign Exchange Administration Policies
M alaysia has alw ays m aintained a liberal foreign exchange adm inistration regim e. The im plem entation of foreign ex-
change adm inistration rules in M alaysia supports the m onitoring of capital flow s into and out of the country to preserve its
financial and econom ic stability.
A s part of M alaysias continuous effort to increase efficiency and reduce cost of doing business, the foreign exchange
adm inistration rules have been progressively liberalised and sim plified.
A. RESIDENTS
To encourage better risk m anagem ent activities, prom ote cost com petitiveness and the use of onshore service
providers, residents
i
are given the flexibility to m anage ow n funds onshore and offshore. Residents m ay enter into
risk m anagem ent arrangem ents w ith licensed onshore banks (licensed com m ercial and Islam ic banks) in M alaysia.
D etails are as listed below :
I Import and Export of Goods and Services
(a) Payment for Goods and Services
A resident m ay pay a non-resident any am ount in foreign currency, other than the currency of the State of Israel,
for im port of goods and services.
A resident m ust receive paym ent for export of goods and services in foreign currency, other than the currency of
State of Israel, from a non-resident.
Proceeds arising from export of goods m ust be received and repatriated by the resident as per the sales contract
w hich should not exceed six m onths from the date of export. Paym ents by a resident to another resident for goods
and services m ust be m ade in ringgit.
(b) Hedging of Payment or Receipt
A resident m ay hedge foreign exchange exposures arising from :
Paym ents due to a non-resident for im port of goods and services;
Receipts due from a non-resident for export of goods and services; or
A nticipation of paym ents or receipts for im port or export of goods and services provided to a non-resident.
A ll hedging activities by residents m ay be undertaken only w ith licensed onshore banks or approved m erchant
banks in M alaysia.
(c) Retention of Foreign Currency Proceeds
U pon receiving proceeds from export of goods and services, the resident m ay sell the foreign currency for ringgit or
another foreign currency or retain in foreign currency accounts m aintained w ith licensed onshore banks or ap-
proved m erchant banks. There are no lim its im posed on the foreign currency accounts.
(d) Reporting on Import or Export of Goods
There is no requirem ent to report to the C ontroller of Foreign Exchange (the C ontroller) for any im port of goods
from non-residents.
O nly resident exporters w ith annual gross export proceeds exceeding the equivalent of RM 50 m illion are required
to subm it quarterly reports to the C ontroller.
P2
II Investments in Foreign Currency Assets
ii
(a) Payment for Investment in Foreign Currency Assets
A resident, individual or com pany, w ithout dom estic ringgit credit facilities
iii
is free to invest in any foreign
currency assets. These investm ents can be financed w ith:
A ny am ount of foreign currency funds converted from residents ow n ringgit funds.
A ny am ount of residents ow n foreign currency funds retained in accounts in M alaysia or overseas.
U p to an aggregate equivalent to RM 10 m illion from foreign currency credit facilities.
A resident, individual or com pany, w ith dom estic ringgit credit facility m ay invest any am ount in foreign
currency assets using foreign currency funds m aintained in M alaysia or offshore. The resident m ay also convert
ringgit funds into foreign currency up to the follow ing lim its for this purpose:
U p to the equivalent of RM 10 m illion in aggregate per calendar year by a com pany on a corporate group
basis.
U p to the equivalent of RM 100,000 in aggregate per calendar year by an individual.
For a resident com pany intending to invest in foreign currency assets, shareholdersfunds of the com pany m ust
be at least RM 100,000 and m ust be in operation for at least one year. This is irrespective w hether the com pany
has or does not have dom estic ringgit credit facilities.
A resident individual m ay also convert ringgit into foreign currency for investm ent in foreign currency securities
under the Em ployee Share O ption/Purchase Schem e offered by overseas parent or related com panies of the
individuals em ployer.
In addition, a resident institutional investor m ay invest in foreign currency assets for resident and non-resident
clients as follow s:
U nit trust m anagem ent com pany:
(i) The full am ount of net asset value (N AV) attributed to non-residents.
(ii) 30% of N AV attributed to residents.
A sset/fund m anagem ent com pany for:
(i) The full am ount of funds placed by non-resident clients.
(ii) The full am ount of funds placed by resident clients w ith no dom estic ringgit credit facilities.
(iii) 30% of funds placed by resident clients w ith dom estic ringgit credit facilities.
Funds from different unit trust m anagem ent com panies and fund m anagers m ay be pooled to benefit from
econom ies of scale w hen purchasing foreign currency assets.
A resident insurance com pany m ay invest in foreign currency assets up to 5% of the com panys m argin of
solvency and 30% of the N AV of investm ent-linked funds m arketed.
A resident takaful operator m ay invest in foreign currency assets up to 5% of the operators total assets.
(b) Hedging of Investments in Foreign Currency Assets
A resident m ay hedge foreign exchange risks arising from paym ent for perm itted investm ents and the value of
existing foreign currency assets. Such hedging m ay be undertaken w ith licensed onshore banks or approved
m erchant banks in M alaysia.
Annex
P3
(c) Registering and Reporting of Overseas Investments in Foreign Currency Assets
A ll paym ents for overseas investm ents exceeding the equivalent of RM 50,000 m ust be registered w ith the C ontroller
at least seven w orking days prior to m aking the paym ents.
A resident w ith outstanding overseas investm ents in excess of the equivalent of RM 1 m illion is required to subm it
quarterly report on the overseas investm ents to the C ontroller.
(d) Registering and Reporting of Onshore Investment in Foreign Currency Assets
There are no requirem ents for registration or reports by a resident investing in foreign currency assets offered by
approved onshore entities.
III Credit Facilities Obtained by Resident
(a) Foreign Currency Credit Facilities
A resident is free to obtain trade financing facilities of any am ount in foreign currency from licensed onshore
banks.
A resident com pany m ay obtain credit facilities in foreign currency up to the equivalent of RM 50 m illion in aggre-
gate on a group basis from licensed onshore banks, licensed m erchant banks and non-residents.
A resident individual m ay also obtain credit facilities in foreign currency up to the equivalent of RM 10 m illion in
aggregate from licensed onshore banks, licensed m erchant banks and non-residents.
A ny am ount exceeding the above perm itted lim its w ould require prior perm ission of the C ontroller. W here the
aggregate am ount exceeds the equivalent of RM 1 m illion and up to the perm itted lim it, the resident (com pany or
individual) is required to register the credit facility w ith the C ontroller, prior to loan draw dow n.
A resident individual or com pany m ay finance investm ents in foreign currency assets up to RM 10 m illion equivalent
in aggregate from foreign currency credit facilities.
There is no restriction for a resident to repay or prepay perm itted credit facilities. A ny prepaym ent exceeding the
equivalent of U SD 10 m illion of the facilities should be registered w ith the C ontroller prior to effecting the
prepaym ents.
(b) Ringgit Credit Facilities
A resident is required to seek prior perm ission of the C ontroller to obtain any am ount of credit facility in ringgit
from non-residents, including from non-resident shareholders or directors.
IV Forward Foreign Exchange Contracts
(a) Permissible Forward Foreign Exchange Contracts
A resident is free to enter into forw ard foreign exchange contracts w ith licensed onshore banks and approved
m erchant banks for the follow ing purposes:
H edging for any paym ents or receipts for im port or export of goods and services as w ell as incom e. The
contracts m ay be based on firm com m itm ent or anticipatory basis.
H edging for any com m itted capital inflow s or outflow s, including:
(i) D raw dow n of perm itted foreign currency credit facilities
(ii) Repaym ent of foreign currency credit facilities up to the am ount repayable w ithin 24 m onths
P4
(iii) Paym ents for perm itted investm ent in foreign currency assets, including extension of credit facilities to
non-residents
H edging for existing investm ents in foreign currency assets
(b) Maturity Date of Contracts
The m aturity date of the forw ard foreign exchange contract should be the expected date of receipt or paym ent of
the underlying transaction. In the event the foreign currency receivables are received earlier, the resident can sell
the foreign currency receipts for ringgit on spot basis or tem porarily retain the receipts in onshore foreign currency
account, pending m aturity of the forw ard foreign exchange contract.
For forw ard sale of export proceeds, the m aturity date of the forw ard foreign exchange contract should not be
later than six m onths after the intended date of export.
For forw ard foreign exchange contract involving tw o foreign currencies, the use or retention of the foreign
currency purchased by the resident m ust be for perm itted purposes.
(c) Interest Rate Swaps
A resident w ith firm underlying com m itm ent m ay enter into interest rate sw aps w ith licensed onshore banks,
approved m erchant banks and licensed offshore banks in Labuan.
V Issuance of Ringgit Private Debt Securities
A resident com pany is free to issue any am ount of ringgit Private D ebt Securities.
Proceeds from the issuance m ay be used for any purpose including the purchase of foreign currency assets of not
m ore than RM 10 m illion in a calendar year.
VI Foreign Currency Accounts (FCA)
A resident, individual or com pany, w ith or w ithout any dom estic credit facilities is free to open FC A to retain any
am ount of foreign currency receipts, other than receipts arising from export of goods from M alaysia, w ith:
licensed onshore banks;
approved m erchant banks;
licensed offshore banks in Labuan; or
overseas banks.
A resident exporter m ay open FC A w ith licensed onshore banks to retain any am ount of foreign currency export
receipts.
A resident individual or com pany m ay convert ringgit into foreign currency and credit into FC A onshore and
offshore. C onversions of ringgit funds m ust com ply w ith requirem ent on investm ents in foreign currency assets.
A resident com pany m aintaining FC A w ith licensed offshore banks in Labuan or overseas banks is required to
subm it m onthly statem ent (Statem ent O A ) to the C ontroller.
B. NON-RESIDENTS
N on-residents are free to invest in M alaysia in any form . There are no restrictions on the repatriation of capital,
profits and incom e earned from M alaysia, including salaries, w ages, royalties, com m issions, fees, rental, interest
profits or dividends. To com plem ent the non-residentsinvestm ent strategy, non-residents m ay obtain financing
from licensed onshore banks both in ringgit and foreign currency and enter into foreign exchange contracts w ith
licensed onshore banks to actively m anage currency risks arising from investm ents in ringgit assets. N on-residents
are also free to convert foreign currency into ringgit and vice versa. D etails are as follow s:
Annex
P5
I Investment in Malaysia
(a) Foreign Direct Investments
A non-resident m ay incorporate a com pany, register a branch, and/or establish sole proprietorship or partnership in
M alaysia w ith the C om panies C om m ission of M alaysia. Please refer to http://w w w .ssm .com .m y/ for details.
Such businesses in M alaysia are resident entities irrespective w hether the businesses are controlled by residents or
non-residents.
A non-resident is free to purchase any ringgit equity irrespective w hether listed or not listed in the M alaysian
exchange.
(b) Portfolio Investments
A non-resident is free to m ake any portfolio investm ents, including purchasing of any ringgit debt securities issued
by non-residents in M alaysia.
(c) Investment in Immovable Properties
A non-resident is free to purchase im m ovable properties (residential and com m ercial) in M alaysia. Such
purchases should com ply w ith guidelines issued by the Foreign Investm ent C om m ittee (FIC ). Please refer to
http://w w w .epu.jpm .m y/ for details.
A non-resident is free to obtain up to three loans from residents to finance the purchase of im m ovable properties
in M alaysia.
A non-resident is required to obtain the prior approval of the C ontroller for financing the purchase of land only.
Loans by dom estic financial institutions are determ ined by the financial institutions ow n policies and the Foreign
Investm ent C om m ittee (FIC ) guidelines.
(d) Opening of Account in Ringgit (External Account)
External A ccount is a ringgit account belonging to a non-resident or w here the beneficiary of the funds in the
account is a non-resident.
A non-resident m ay open and m aintain any num ber of External A ccounts w ith any onshore financial institutions.
There is no restriction on the am ount of ringgit funds that can be retained in the External A ccount.
Ringgit funds in an External A ccount can be used for the follow ing purposes:
Purchase of foreign currency, excluding the currency of the State of Israel.
Purchase of ringgit assets in M alaysia.
Paym ent for goods and services for ow n use in M alaysia.
Paym ent of adm inistrative and statutory expenses incurred in M alaysia.
Paym ent under a non-financial guarantee to a resident.
Extension of ringgit credit facilities to em ployees in M alaysia in accordance w ith the term s and conditions of
em ploym ent.
P6
Transfers to:
(i) A nother External A ccount of the sam e account holder.
(ii) A nother External A ccount of different account holder or Resident A ccount by w ay of:
A utom ated Teller M achine transfer up to RM 5,000 per person, per day, per bank for any purpose.
Internet-bank transfers up to RM 5,000 per person, per day, per bank for any purpose.
Paym ent to residents for any purpose other than the follow ing:
(i) Paym ent for the im port of goods and services.
(ii) Extension of ringgit credit facilities to residents other than perm itted by the C ontroller.
(iii)Settlem ent under financial guarantees.
(iv)Paym ent on behalf of a third party.
Ringgit funds in the External A ccount m ay be derived from :
Sale of foreign currency, other than the currency of the State of Israel, for ringgit w ith licensed onshore banks.
Sale of ringgit assets.
A ll incom e derived in M alaysia including salaries, w ages, royalties, com m issions, fees, rental, interest, profits
or dividends.
Proceeds from ringgit credit facilities perm itted by the C ontroller.
Proceeds from repaym ent of ringgit credit facilities perm itted by the C ontroller.
Transfers from :
(i) A nother External A ccount of the sam e account holder.
(ii) A nother External A ccount of different account holder or Resident A ccount by w ay of:
A utom ated Teller M achine transfer up to RM 5,000 per person, per day, per bank for any purpose.
Internet-bank transfers up to RM 5,000 per person, per day, per bank for any purpose.
D eposit of ringgit notes not exceeding RM 10,000 per day.
D eposit of ringgit cheques up to RM 5,000 per cheque for any purpose.
There are no restrictions on the operation of External A ccounts belonging to:
N on-residents w orking or studying in M alaysia (including their spouse, children and/or parents w ho are
currently residing in M alaysia).
N on-resident participants of the M alaysia M y Second H om e program m e.
C entral banks, Em bassies, C onsulates, H igh C om m issions, supranational or international organisations
recognised by the G overnm ent of M alaysia.
Such persons or organisations can use funds in the External A ccounts for all purposes, including the perm issible
purposes referred above.
Annex
P7
(e) Opening of Account in Foreign Currency
There are no restrictions on a non-resident to open and m aintain any num ber of foreign currency accounts w ith
licensed onshore banks and licensed m erchant banks in M alaysia. There is also no restriction on the am ounts that
can be retained in these accounts.
There are no restrictions im posed on the use of foreign currency funds in the account. Funds in such accounts m ay
be converted into ringgit w ith licensed onshore banks or m ay be repatriated at any tim e.
(f) Lending to Residents in Ringgit
A non-resident m ay lend in ringgit to a resident w ho has obtained prior perm ission of the C ontroller.
(g) Lending to Residents in Foreign Currency
A non-resident m ay lend in foreign currency to a resident as long as the residents total foreign currency credit
facilities are w ithin perm itted lim its.
II Payment for Investments
A non-resident m ay pay in foreign currency or in ringgit from ow n External A ccount for investm ents in M alaysia.
III Borrowing from Residents in Ringgit
A non-resident is free to obtain ringgit credit facilities as follow s:
From licensed banking institutions in M alaysia up to an aggregate of RM 10 m illion for use in M alaysia by the
non-resident w hich is not a non-resident correspondent bank or non-resident stockbroking com pany.
From licensed onshore banks up to RM 200 m illion on intra-day and overnight basis by a non-resident
stockbroking com pany or a custodian bank. The facilities are strictly for financing funding gaps due to settle-
m ent tim ing m ism atches, unforeseen or inadvertent /technical adm inistration errors or delays due to tim e zone
difference in relation to settlem ent of trades on Bursa M alaysia (stock exchange in M alaysia).
From resident stockbroking com panies in the form of m argin financing by the non-resident w hich is not a non-
resident correspondent bank or non-resident stockbroking com pany.
From resident insurers up to the value of the cash surrender value of the insurance policies purchased by the
non-resident.
From a non-bank resident up to RM 10,000.
From residents, including financial institutions, up to three loans to finance the purchase of im m ovable proper-
ties in M alaysia.
From residents and non-residents through issuance of Ringgit Private D ebt Securities in M alaysia by M ultilateral
D evelopm ent Banks or foreign m ultinational corporations.
IV Borrowing from Residents in Foreign Currency
A non-resident m ay obtain any am ount of foreign currency credit facilities from licensed onshore banks, approved
m erchant banks and non-bank residents w ith no dom estic ringgit credit facilities.
V Hedging of Investments
A non-resident is free to enter into a foreign exchange contract on spot or forw ard basis w ith a licensed onshore
bank for the follow ing:
P8
To buy ringgit to m ake paym ent to a resident.
To sell ringgit funds arising from a com m itted transaction in M alaysia.
The m aturity date of the foreign exchange contracts should be the expected date of paym ents or receipts of the
underlying com m itted transactions.
The total am ount of the foreign exchange contracts should not exceed the expected sum of paym ents or receipts
of the underlying com m itted transactions.
VI Sale of Investments
A non-resident m ay sell any investm ents in M alaysia, including securities not listed on Bursa M alaysia, to a resident
or to a non-resident.
A resident m ay pay or settle the purchase of the ringgit assets from the non-resident seller in ringgit or in foreign
currency.
A non-resident purchaser m ay also pay or settle the purchase of ringgit assets from the non-resident seller in
foreign currency or ringgit from ow n External A ccount.
VII Repatriation of Funds
A non-resident is free to repatriate any am ount of ow n funds in M alaysia any tim e, including capital, divestm ent
proceeds, profits, dividends, rental, fees and interest arising from investm ents in M alaysia.
C. COMPANIES ACCORDED SPECIAL STATUS
I Offshore Entities in the Labuan International Offshore Financial Centre
A n offshore entity incorporated or registered under the O ffshore C om panies A ct 1990 is declared as a non-resident
for foreign exchange adm inistration purposes.
A s a non-resident, the offshore entity is free to undertake the follow ing:
O btain any am ount of foreign currency credit facilities.
Invest any am ount in foreign currency assets.
Enter into foreign exchange contracts involving foreign currencies w ith licensed onshore banks, approved
m erchant banks, licensed offshore banks in Labuan and any overseas counterparty.
Buy or sell foreign currency (other than the currency of the State of Israel) against ringgit w ith licensed onshore
banks for perm itted purposes.
M aintain External A ccounts w ith licensed onshore banks to facilitate the defraym ent of statutory and adm inis-
trative expenses in M alaysia.
Receive paym ents in ringgit from residents arising from fees, com m issions, dividends or interest from deposit of
funds w ith onshore financial institutions.
Invest in ringgit assets that are transacted directly w ith onshore banking institutions or resident brokers for ow n
account.
In addition, an offshore insurance entity in Labuan is allow ed to receive reinsurance prem ium s and pay claim s
arising from reinsurance of dom estic insurance business in ringgit.
Annex
P9
II Multimedia Super Corridor Companies
A com pany w ith M ultim edia Super C orridor (M SC ) status is exem pted from foreign exchange adm inistration
requirem ents for transactions undertaken on ow n account.
III Approved Operational Headquarters
A n A pproved O perational H eadquarter (O H Q ) is subject to policies applicable to a resident. In addition, an O H Q is
allow ed to:
O btain any am ount of foreign currency credit facilities from licensed onshore banks and licensed m erchant
banks in M alaysia, and from any non-resident, provided the O H Q does not on-lend to, or raise the funds on
behalf of, any resident.
Invest any am ount in foreign currency assets to be funded w ith foreign currency funds or borrow ing.
IV Regional Distribution Centres and International Procurement Centres
A Regional D istribution C entre and International Procurem ent C entre are also subject to policies applicable to
residents.
D. STATISTICAL REPORTING
To assist the C ontroller to com pile balance of paym ents statistics, residents transacting w ith non-residents or have
overseas foreign currency assets or liabilities, are required to subm it statistical form s/reports/statem ents to the
C ontroller, w here applicable. Inform ation on the statistical requirem ents can be obtained from Bank N egara
M alaysias w ebsite, http://w w w .bnm .gov.m y/fxadm in.
i
Residents:
(a) Citizens of Malaysia (excluding persons who have obtained permanent resident status of a territory outside Malaysia and are residing abroad)
(b) Non-citizens who have obtained permanent resident status in Malaysia and are residing permanently in Malaysia
(c) Persons, whether body corporate or unincorporated, registered or approved by any authority in Malaysia
Non-residents:
(a) Persons other than residents
(b) Overseas branches, overseas subsidiaries, overseas regional offices, sales offices, representatives offices of resident companies
(c) Embassies, Consulates, High Commissions, supranational or international organisations recognised by the Government of Malaysia
(d) Malaysian citizens who have obtained permanent resident status of a territory outside Malaysia and are residing outside Malaysia
ii
Foreign currency assets include lending to non-residents, placement of deposits with licensed onshore banks, approved merchant banks or offshore banks, and
foreign currency products offered by licensed onshore banks, approved merchant banks and other entities approved by the Controller
iii
Domestic ringgit credit facilities means any ringgit advance, loan, trade financing, hire purchase, factoring, leasing facilities, redeemable preference shares or similar
facility in whatever name or form, other than:
(a) Trade credit terms extended by a supplier for all types of goods and services
(b) Forward exchange contracts entered into with authorised dealers
(c) One personal housing loan and one vehicle loan obtained from residents
(d) Credit card and charge card facilities
(e) Inter company borrowing within a corporate group in Malaysia
P10
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Annex
P11
Financial Sector Masterplan
List of C om pleted and O n-going Recom m endations
Banking Sector
Completed recommendations
R3.4 Liberalised restrictions on salaries and staff m obility in the banking industry to enable the industry to
attract the best talent and rew ard them accordingly.
R3.5 U plift restrictions on em ploym ent of expatriates to attract the best international talents to m eet the
dem and for expertise in specific areas of banking.
R3.6 Established Board com m ittees, nam ely N om inating, Rem uneration and Risk M anagem ent com m ittees to
further enhance corporate governance standards.
R3.7 A llow ed group rationalisation through cross-selling of products and consolidation of back-office
processes, as w ell as facilitate the m erger of com m ercial banks and finance com panies to further enhance
efficiency and com petitiveness.
R3.9 Stream lined the regulation of discount houses and m erchant banks to enhance and allow fair
com petition am ong players.
R3.10* Established investm ent banks through m ergers betw een m erchant banks and stockbroking com panies or
discount houses to reduce duplication, enhance com petitiveness and strengthen the potential to capitalise
on expanded business opportunity thus contributing tow ards the econom ic transform ation process.
R3.12 Encouraged outsourcing of non-core functions to gain greater strategic focus and efficiency.
R3.14 Encouraged the developm ent of new delivery channels to increase the range of products and services to
further enhance com petitiveness.
R3.15.1 Sim plified the product notification process to provide incentive for the developm ent of new and innovative
and products, and outline a set of guidelines providing criteria for product notification and specific product
R3.15.2 approval requirem ents.
R3.16a Introduced the N ew Interest Rate Fram ew ork to provide banking institutions w ith greater flexibility, thus
prom oting m ore efficient pricing of products.
R3.18 Encouraged participation of banking institutions in areas currently served by fringe institutions to
prom ote a level playing field and preserve consum er protection and investorsinterests.
R3.21 Im plem ented risk-based supervision w ith supervisory focus on high risk areas and greater attention on
w eak institutions.
R3.22a Incorporated m arket risk into the capital adequacy fram ew ork to introduce m ore risk sensitivity to the
existing regulatory capital requirem ents.
R3.23 D eveloped a form al and inform al enforcem ent action fram ew ork to ensure banking institutions take
rem edial actions on w eaknesses highlighted.
R3.26f* Enhanced the level of corporate governance am ong licensed institutions by prescribing broad principles
and m inim um standards as w ell as specific requirem ents to ensure safety and soundness of licensed
institutions.
R3.27 Increased efficiency and com petition in the paym ents system to support the needs of the econom y w hile
m aintaining its safety and integrity.
R3.28 A llow ed m arket forces to shape developm ents in the paym ents system to prom ote greater com petition
and increase innovation in paym ents system .
R3.30* A llow ed m oney brokers to com plem ents its voice broking sevices by offering electronic broking system to
its clients.
R3.33 A llow ed banking institutions to rationalise their branch netw ork to im prove the dispersion of their
branches in the country.
R3.37 Expanded the role of the Banking M ediation Bureau w ith the establishm ent of the Financial M ediation
Bureau to strengthen consum er protection fram ew ork and to w iden avenues for consum ers to seek redress.
P12
R3.39* Established a deposit insurance system to provide a reasonable level of protection to depositors w hile
prom oting incentive for prudent m anagem ent by banking institutions.
On-going recommendations
R3.1 D evelop and dissem inate industry-w ide benchm arks to enable dom estic banking institutions to assess their
relative perform ance against m arket leaders, identify the perform ance gaps and, accordingly, recognise their
com parative strengths and w eaknesses to develop appropriate strategies to rem ain com petitive.
R3.2 Increase aw areness of best practice by conducting focused training and sem inar series for senior
m anagem ent to prom ote greater understanding on em erging trends and issues facing the banking industry.
R3.3 Enhance credit skills of credit officers and m anagers w ith the aim to prom ote sound lending decisions
and credit culture and m onitor the requirem ent for accreditation.
R3.8 Encourage dom estic banking institutions to form strategic alliances w ith other banking institutions and
non-banking institutions to provide consum ers w ith greater access to w orld-class products and services
and tow ards m eeting international best practice standards.
R3.13 Require m anagem ent of banking institutions to accord greater attention to the developm ent of
inform ation and com m unication technology (IC T) to ensure appropriate IC T strategies as a strategic tool
tow ards bringing about holistic im provem ent w ithin banking institutions.
R3.15 A dopt w hat is not prohibited is allow edregulatory philosophy and phase out product pre-approval
requirem ent to encourage innovation.
R3.19 Facilitate the developm ent of a conducive tax regim e to provide incentives to encourage innovation via
greater research and developm ent.
R3.24 Im plem ent a transparent and clearly structured early w arning system and set of prom pt corrective
m easures for w eak banking institutions to ensure sound and stable banking system .
R3.32 Require provision of advisory services on financial planning and m anagem ent to sm all and m edium
industries and sm all borrow ers to enable these borrow ers to m ake inform ed decisions and better
understand financial planning and m anagem ent.
R3.34 D evelopm ent of an active and structured consum er education program m e to prom ote greater financial
literacy and prom ote active consum erism .
R3.36 Encourage consum ers to pursue form al adm inistrative and legal redress to protect consum ers against
unfair practices by banking institutions.
Insurance Sector
Completed recommendations
R4.1 Rem oved restrictions on outsourcing to enable insurers to further develop core com petencies and
effective business strategies.
R4.2 A llow ed eligible insurers to use the internet as a distribution channel to enhance com petitiveness
and efficiency of the insurance industry.
R4.3 Prom oted the grow th of bancassurance as a cost-effective alternative distribution channel by
im plem enting a m ore flexible regulatory fram ew ork on rem uneration structures governing
bancassurance arrangem ents.
R4.6 Relaxed the restrictions on em ploym ent of expatriates to accelerate the developm ent of skills and
expertise in the industry.
R4.9* Introduced a regulatory fram ew ork for the licensing of financial advisers to prom ote higher
standards of financial services and enable consum ers to obtain professional advice on a w ider range
of financial products and services.
R4.16 Increased the statutory m inim um paid-up capital of insurers to enhance their financial resilience and
ability to com pete effectively in a m ore deregulated and liberalised m arket.
Annex
P13
R4.17 Strengthened fit and properregulations for board m em bers and senior m anagem ent of insurance
com panies, including m inim um qualification standards and training requirem ents for directors to
prom ote sound corporate governance.
R4.18 Established board com m ittees w ith specific responsibilities and enhance disclosure standards on
com pensation to directors and senior m anagem ent to further strengthen governance structures and
processes and prom ote greater transparency.
R4.19 Raised the entry requirem ents for the agency force to uphold high standards of professionalism and
com petencies am ong insurance interm ediaries.
R4.20 Introduced additional com pulsory exam s as part of continuing education program m es for agents to
upgrade their know ledge and skills on an on-going basis.
R4.21 Further strengthen perform ance-based supervision to m aintain stability under a m ore deregulated and
com petitive m arket conditions.
R4.22 D eveloped an enforcem ent action fram ew ork to ensure tim ely and consistent supervisory intervention
processes to address institutional risks.
R4.25 Established the Financial M ediation Bureau to strengthen consum er protection fram ew ork and w iden
avenues for consum ers to seek redress.
R4.26 Introduced best adviceregulations to enhance consum er protection and professionalism in the sale of
life insurance products by insurance interm ediaries.
R4.27 Strengthened regulations on unfair trade practices to ensure sound business practices and fair treatm ent
of consum ers.
R4.29 A llow ed financial and non-financial institutions to acquire interests in direct insurers to create business
synergies.
On-going recommendations
R4.5 Prom ote the m anagem ent of pension funds by insurers to achieve the m ost efficient and effective
m anagem ent of the pension funds.
R4.8 A llow insurers to distribute other personal financial service products to enable insurers to m ake m ore
effective use of the agency force and other distribution channels.
Islamic Banking and Takaful
Completed recommendations
R5.3 Build strong m anagem ent through the establishm ent of board com m ittees, benchm arking and
em ploym ent of experienced and qualified staff.
R5.5 Increased the num ber of Islam ic banks to stim ulate greater com petition and accelerate international
integration by issuing Islam ic banking licences to qualified dom estic and foreign banking institutions.
R5.6 Increased the num ber of takaful operators to accelerate the expansion of the takaful industry.
R5.10 Established a com prehensive legal infrastructure for consum ers to seek legal redress arising from Islam ic
financial transactions.
On-going recommendations
R5.1 D evelop and dissem inate industry w ide benchm arks to enable Islam ic banking institutions to evaluate
their relative efficiency, identify the perform ance gaps and form ulate appropriate strategies to im prove
and deliver the best results.
R5.2 Enhance the level of know ledge, com petency and expertise in order to increase the pool of highly
qualified and skilled/trained staff in Islam ic banking and finance.
R5.11 C reate a favourable tax regim e in the im plem entation of Islam ic financial contracts.
P14
Development Financial Institutions
Completed recommendations
R6.4 Introduced a system atic fram ew ork for sourcing funds to ensure appropriate and adequate funding for
the operations of developm ent financial institutions (D FIs).
R6.7 Established a legislative fram ew ork to regulate and supervise D FIs to ensure that D FIspolicies and
objectives are consistent w ith the national policy objectives.
R6.8 Established a single Regulatory and Supervisory A uthority (RSA ) to strengthen the supervision of D FIs.
On-going recommendations
R6.5 C ontinued G overnm ents support to the D FIs and enhance coordination am ong relevant m inistries to
enable these D FIs to operate in a m ore focused, efficient and prudent m anner in supporting their
respective targeted sectors.
Alternative Modes of Financing
Completed recommendations
R7.2 Established a RM 500 m illion venture capital fund to increase the availability of venture capital financing
and stim ulate new ventures.
R7.3 Introduced further tax incentives for the venture capital industry to prom ote the grow th of venture capital.
R7.4 Liberalised the M ESD A Q listing requirem ents to facilitate the exit of venture capital com panies from their
investm ents.
R7.5 Established tw o Islam ic venture capital funds w ith a com bined initial fund size of RM 22.1 m illion.
On-going recommendations
R7.13 Established a one-stop agriculture research and developm ent centre as w ell as a com prehensive and
integrated inform ation database to facilitate banking institutions in their assessm ent of specialised risks
involved in agriculture financing.
R7.14 D evelop structured and system atic training program m e for borrow ers to ensure an orderly developm ent
of the players in the agriculture sector.
R7.15 Putting in place an effective risk-distribution m echanism that w ill reduce risks to the financial institutions
and, at the sam e tim e, reduce borrow ing costs through a guarantee and insurance protection schem e.
R7.15.2 D iversify insurance protection schem es to cater for the unique features of the various sub-sectors w ithin
the agriculture sector.
R7.16 Provide subsidies to agriculture industry to help reduce insurance costs, especially for sm all scale farm ers.
R7.17 G rant tax exem ptions to provide greater financial assistance to the agriculture sector.
Labuan International Offshore Financial Centre
Completed recommendations
R8.3 A dopted a consultative and m arket driven approach to create a conducive tax and business environm ent
to enhance the com petitiveness and attractiveness of Labuan.
R8.6 Strengthened Islam ic banking and finance as w ell as takaful to develop Labuan w ith a strategic focus on
Islam ic products and services.
R8.7 Enhanced Labuan International Financial Exchange (LFX) to be a one-stop financial exchange for residents
and global com panies.
On-going recommendations
R8.1 D evelop an active International O ffshore Financial C entre (IO FC ) for M alaysia to support the increasing
dem ands of the dom estic econom y and to play an im portant com plem entary role to the M alaysian
financial system .
Annex
P15
R8.2 Review existing rules and regulations to facilitate expansion in the scope of core business to facilitate new
offshore businesses and allow offshore service providers to m axim ise capabilities and expertise to expand
their business.
R8.4 Benchm ark against the leading IO FC s in various areas of business to further im prove com petitiveness,
especially in term s of pricing and cost.
R8.5 Establish a w ell-balanced regulatory policy and supervisory fram ew ork w hich are in line w ith latest
international supervisory regim e.
R8.8 Enhance the e-com m erce gatew ay to encourage global e-com m erce operators to set up dom icile in
Labuan.
R8.9 M axim ise potentials of Labuan IO FC by developing other com plem entary econom ic m easures.
* Recom m endations com pleted in 2005.
P16
Licensed Banking Institutions (as at 31 December 2005)
Commercial Banks
1. A BN A M RO Bank Berhad
2. A ffin Bank Berhad
1
3. A lliance Bank M alaysia Berhad
4. A m Bank (M ) Berhad
2
5. Bangkok Bank Berhad
6. Bank of A m erica M alaysia Berhad
7. Bank of C hina (M alaysia) Berhad
8. Bank of Tokyo-M itsubishi (M alaysia) Berhad
3
9. Bum iputra-C om m erce Bank Berhad
10. C itibank Berhad
11. D eutsche Bank (M alaysia) Berhad
12. EO N Bank Berhad
13. H ong Leong Bank Berhad
14. H SBC Bank M alaysia Berhad
15. J.P. M organ C hase Bank Berhad
16. M alayan Banking Berhad
17. O C BC Bank (M alaysia) Berhad
18. Public Bank Berhad
19. RH B Bank Berhad
20. Southern Bank Berhad
21. Standard C hartered Bank M alaysia Berhad
22. The Bank of N ova Scotia Berhad
23. U nited O verseas Bank (M alaysia) Berhad
Islamic Banks
1. Bank Islam M alaysia Berhad
2. Bank M uam alat M alaysia Berhad
3. RH B ISLA M IC Bank Berhad
4. C om m erce TIJA RI Bank Berhad
5. H ong Leong Islam ic Bank Berhad
6. Kuw ait Finance H ouse (M alaysia) Berhad
1
M erged w ith A FFIN -A C F Finance Berhad w ith effect from 1 June 2005
2
A bsorbed by A m Finance Berhad and changed the nam e to A m Bank (M ) Berhad w ith effect from 1 June 2005
3
C hanged the nam e to Bank of Tokyo-M itsubishi U FJ (M alaysia) Berhad w ith effect from 1 January 2006
Annex
P17
Finance Companies
1. Bum iputra-C om m erce Finance Berhad
4
2. RH B D elta Finance Berhad
5
3. Southern Finance Berhad
6
Merchant Banks
1. A ffin M erchant Bank Berhad
2. A lliance M erchant Bank Berhad
3. A m M erchant Bank Berhad
4. A seam bankers M alaysia Berhad
5. C om m erce International M erchant Bankers Berhad
6. M alaysian International M erchant Bankers Berhad
7. Public M erchant Bank Berhad
8. RH B Sakura M erchant Bankers Berhad
9. Southern Investm ent Bank Berhad
10. U tam a M erchant Bank Berhad
4
A bsorbed into Bum iputra-C om m erce Bank Berhad w ith effect from 1 January 2006
5
A bsorbed into RH B Bank Berhad w ith effect from 1 January 2006
6
A bsorbed into Southern Bank Berhad w ith effect from 1 January 2006
P18
Financial Institutions Offering Islamic Banking Services
(as at 31 December 2005)
Islamic Banks
1. Bank Islam M alaysia Berhad
2. Bank M uam alat M alaysia Berhad
3. C om m erce TIJA RI Bank Berhad
4. H ong Leong Islam ic Bank Berhad
5. Kuw ait Finance H ouse (M alaysia) Berhad
6. RH B ISLA M IC Bank Berhad
Participating Banks in the Islamic Banking Scheme
Commercial Banks
1. A ffin Bank Berhad
2. A lliance Bank M alaysia Berhad
3. A m Bank (M ) Berhad
4. C itibank Berhad
5. EO N Bank Berhad
6. H SBC Bank M alaysia Berhad
7. M alayan Banking Berhad
8. O C BC Bank (M alaysia) Berhad
9. Public Bank Berhad
10. Southern Bank Berhad
11. Standard C hartered Bank M alaysia Berhad
Finance Company
1. Southern Finance Berhad
Merchant Banks
1. A ffin M erchant Bank Berhad
2. A lliance M erchant Bank Berhad
3. A m M erchant Bank Berhad
4. C om m erce International M erchant Bankers Berhad
Annex
P19
Discount Houses
1. A brar D iscounts Berhad
2. A ffin D iscount Berhad
3. A m anah Short D eposits Berhad
4. C IM B D iscount H ouse Berhad
5. KA F D iscounts Berhad
6. M alaysia D iscount Berhad
7. M ayban D iscount Berhad
Development Financial Institutions Offering Islamic Banking Services
1. Bank Kerjasam a Rakyat M alaysia Berhad
2. Bank Sim panan N asional
3. Bank Pem bangunan M alaysia Berhad
4. Bank Pertanian M alaysia
5. Bank Perusahaan Kecil & Sederhana M alaysia Berhad
P20
Shariah Advisory Council Members
Chairman:
Y.A .A . D atuk Sheikh G hazali A bdul Rahm an
Deputy Chairman:
D r. M ohd D aud Bakar
Members:
1. S.S. D atoH aji H assan H aji A hm ad
2. Y.A . D atoA bdul H am id H aji M oham ad
3. D atoD r. A bdul H alim H aji Ism ail
4. D atuk H aji M d. H ashim H aji Yahaya
5. D atuk D r. A bdul M onir Yaacob
6. A ssoc. Prof. D r. A bdul H alim M uham m ad
7. D r. M ohd A li H aji Baharum
8. D r. M ohd Parid Sheikh A hm ad
Annex
P23
2001 2002
RM m illion
A griculture
M ining and quarrying
M anufacturing
C onstruction
Services
Less: Im puted bank service charges
Plus: Im port duties
GDP at purchasers' prices
1
A nnual change (% )
A griculture
M ining and quarrying
M anufacturing
C onstruction
Services
Less: Im puted bank service charges
Plus: Im port duties
GDP at purchasers' prices
2003 2004 2005p 2006f
1
N um bers m ay not necessarily add up due to rounding
p Prelim inary
f Forecast
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
Table A.1
Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices
20,134
16,720
71,544
7,359
133,751
22,431
5,282
18,551 19,064
15,160 15,810
63,299 66,019
7,108 7,251
120,194 127,968
17,678 21,073
4,594 5,384
211,227 220,422
-0.6 2.8
-1.5 4.3
-5.9 4.3
2.1 2.0
6.0 6.5
11.7 19.2
-2.7 17.2
0.3 4.4
232,359
5.6
5.8
8.4
1.5
4.5
6.4
-1.9
5.4
21,137
17,372
78,558
7,248
142,849
23,205
4,995
248,954
21,585
17,504
82,394
7,133
152,205
23,876
5,083
262,029
5.0
3.9
9.8
-1.5
6.8
3.4
-5.4
7.1
2.1
0.8
4.9
-1.6
6.5
2.9
1.8
5.3
22,010
18,378
88,122
7,204
161,330
24,525
5,107
277,626
2.0
5.0
7.0
1.0
6.0
2.7
0.5
6.0
P24
Table A.2
Growth in Manufacturing Production (2000=100)
2002 2003 2004 2005 2005 2004 2003
Index A nnual change (% )
Export-oriented industries
Electrical m achinery, apparatus,
appliances and supplies
Electronics
Electrical products
C hem icals and chem ical products
Petroleum products
1
Textiles, w earing apparel and footw ear
W ood and w ood products
Rubber products
O ff-estate processing
O thers
Domestic-oriented industries
C onstruction-related products
Non-metallic mineral products
Basic iron & steel and
non-ferrous metal
Food products
Transport equipm ent
Fabricated m etal products
Paper products
Beverages
Tobacco products
Total
Source: D epartm ent of Statistics, M alaysia
1
U nder the new Industrial Production Index (2000=100), LN G has been reclassified as petroleum products (previously classified as
chem icals and chem ical products). C onsequently, petroleum products have been reclassified as export-oriented industries
12.7
14.8
22.6
0.9
17.7
9.5
-1.6
0.9
17.4
5.6
4.8
4.6
6.8
6.8
6.6
5.9
-3.4
6.3
2.7
22.4
3.9
10.9
107.9
104.4
108.3
96.8
117.2
116.0
85.5
95.7
124.2
118.0
90.0
114.0
109.8
114.0
101.8
118.1
124.0
116.6
106.2
110.9
87.9
109.1
95.7
90.9
88.3
96.0
99.6
105.9
86.8
94.9
105.9
111.7
85.9
109.0
102.8
106.7
95.5
111.5
128.3
109.6
103.5
90.6
84.6
98.4
123.8
124.5
136.0
102.1
134.9
127.4
81.4
107.9
134.3
121.2
111.4
119.9
111.2
111.0
111.7
120.5
138.5
129.9
110.7
112.4
90.5
123.0
130.8
128.9
143.0
101.3
149.7
141.2
84.1
109.6
133.8
131.0
107.4
123.2
110.7
113.2
105.8
129.7
150.2
123.5
119.0
119.3
87.8
129.3
14.8
19.3
25.6
5.5
15.1
9.8
-4.8
12.8
8.1
2.7
23.9
5.2
1.3
-2.6
9.7
2.0
11.7
11.4
4.2
1.4
2.9
12.8
5.7
3.5
5.2
-0.8
11.0
10.8
3.4
1.5
-0.4
8.1
-3.7
2.8
-0.5
2.0
-5.3
7.6
8.5
-4.9
7.5
6.1
-3.0
5.1
Annex
P25
11,909
890
20,649
48
698
4,676
4.2
Table A.3
Production of Primary Commodities
2002 2003 2004 2005p 2001 2002 2003 2004
Volum e A nnual change (% )
C rude palm oil
(000 tonnes) 11,804 13,355 8.9 0.9 12.1
Rubber
1
(000 tonnes) 882 986 1,169
Saw logs
(000 cu. m etres) 18,923 21,532 -18.0 9.1 4.3
C ocoa
(000 tonnes) 58 36
C rude oil (including
condensates)
(000 bpd) 666 738 -2.4 4.9 5.6
N atural gas
(m m scfd) 4,542 5,013 3.7 3.0 7.2
Tin-in-concentrates
(000 tonnes) 5.0 3.4 2.7
13,976
1,124
21,509
33
762
5,196
14,961
21,334
28
727
5,800
2.8
4.7
-3.8
-0.1
-7.8
3.6
4.0
2.0
Source: M alaysian Palm O il Board
D epartm ent of Statistics, M alaysia
Forestry D epartm ents (Peninsular M alaysia, Sabah & Saraw ak)
M alaysian C ocoa Board
PETRO N A S
M inerals and G eoscience D epartm ent, M alaysia
2001
-4.9 0.9 10.8 18.6
-17.9 -17.4 -24.0
-21.2 -15.2 -20.3 -18.3
2005p
7.0
-0.8
-16.3
-4.9
11.3
p Prelim inary
1
Revised from 2000 onw ards based on new com pilation m ethodology
P26
Table A.4
GNP by Demand Aggregates
2001 2002 2003 2004 2005p
at C urrent Prices
(RM m illion)
C onsum ption 192,909 209,022 227,279 252,088 280,468 306,179
Private consumption 150,644 159,506 172,366 192,771 215,876 237,832
Public consumption 42,265 49,516 54,913 59,317 64,592 68,347
Investm ent 83,345 83,764 87,089 91,818 98,930 107,106
Private investment 34,528 29,376 29,856 38,394 43,769 49,195
Public investment 48,817 54,388 57,233 53,424 55,161 57,911
C hange in stocks
1
-3,339 3,105 -1,814 10,009 -1,059 1,334
Exports of goods and services 389,255 415,040 447,846 544,956 609,133 682,398
Im ports of goods and services 327,767 348,919 365,383 449,262 492,928 554,250
G D P at purchasers' value 334,404 362,012 395,017 449,609 494,544 542,766
N et factor paym ents abroad -25,623 -25,061 -22,537 -24,549 -21,470 -23,716
G N P at purchasers' value 308,781 336,951 372,480 425,060 473,074 519,050
at C onstant 1987 Prices
(RM m illion)
C onsum ption 125,637 132,872 143,198 156,739 169,993 180,111
Private consumption 97,630 101,946 108,722 120,181 131,266 140,132
Public consumption 28,007 30,926 34,476 36,558 38,727 39,979
Investm ent 63,050 63,249 64,960 66,996 70,175 74,339
Private investment 26,120 22,181 22,270 28,015 31,047 34,145
Public investment 36,930 41,068 42,690 38,981 39,128 40,194
C hange in stocks
1
-1,279 3,200 -1,267 5,464 -1,708 889
Exports of goods and services 227,685 237,904 251,463 292,476 316,959 345,075
Im ports of goods and services 203,866 216,802 225,996 272,721 293,391 322,789
G D P at purchasers' value 211,227 220,422 232,359 248,954 262,029 277,626
N et factor paym ents abroad -17,642 -17,253 -15,204 -15,870 -13,999 -15,163
G N P at purchasers' value 193,585 203,169 217,155 233,084 248,030 262,462
f Forecast
1
Includes statistical discrepancy
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
2006f
Annex
P27
f Forecast
Table A.5
Savings-Investment Gap
2001 2002 2003 2004 2005p
RM m illion
Public gross dom estic capital form ation
48,817 54,388 57,233 53,424
Public savings
35,748 49,459 60,093 73,000
D eficit/surplus
-13,069 -4,929 2,860 19,576
Private gross dom estic capital form ation
31,189 32,481 28,042 48,403
Private savings
71,945 67,904 75,807 85,338
D eficit/surplus
40,756 35,423 47,765 36,935
G ross dom estic capital form ation
80,006 86,869 85,275 101,827
(as % of G N P)
25.9 25.8 22.9 24.0
G ross national savings
107,693 117,363 135,900 158,338
(as % of G N P)
34.9 34.8 36.5 37.3
Balance on current account
27,687 30,494 50,625 56,511
(as % of G N P)
9.0 9.0 13.6 13.3
2006f
p Prelim inary
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
57,911
82,899
24,988
50,529
114,950
64,421
108,440
20.9
197,849
38.1
89,409
17.2
55,161
75,048
19,887
42,710
100,595
57,885
97,871
20.7
175,643
37.1
77,772
16.4
P28
Table A.6
Balance of Payments
2002
Item
RM m illion
Goods
1
Trade account
Services
Transportation
Travel
O ther services
G overnm ent transactions n.i.e.
2
Balance on goods and services
Income
C om pensation of em ployees
Investm ent incom e
3
Current transfers
Balance on current account
% of GNP
Capital account
Financial account
D irect investm ent
Abroad
In Malaysia
Portfolio investm ent
O ther investm ent
Official sector
Private sector
Errors and omissions
of w hich:
Foreign exchange revaluation
gain (+) / loss (-)
Overall balance
(surplus + / deficit -)
Bank Negara Malaysia
international reserves, net
4
RM m illion
U SD m illion equivalent
Reserves as m onths of
retained im ports
1
A djusted for valuation and coverage to the balance of paym ents basis. Im ports include m ilitary goods w hich are not included in trade data
2
3
Include undistributed earnings of foreign direct investm ent com panies. The counterpart of these earnings is show n as
reinvested earnings under "D irect Investm ent" in the Financial A ccount
Include transactions of foreign m ilitary and diplom atic establishm ents
4
A ll assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance
sheet date and the gain/loss has been reflected accordingly in the Banks account
e Estim ate
f Forecast
n.i.e. N ot included elsew here
N ote: N um bers m ay not necessarily add up due to rounding
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
2003
358,504 286,387 72,117
357,430 303,090 54,340
56,536 62,532 -5,996
10,847 22,419 -11,572
27,049 9,947 17,102
18,166 29,408 -11,242
474 758 -284
415,040 348,919 66,121
8,129 33,190 -25,061
1,653 2,832 -1,179
6,476 30,358 -23,882
2,513 13,079 -10,566
425,682 395,188 30,494
9.0
-11,941
4,935
-7,238
12,173
-6,506
-10,370
4,720
-15,090
-11,941
-4,362
6,627
14,191
131,394
34,577
5.4
+ - N et + - N et
397,969 300,207 97,762
397,884 316,538 81,347
49,876 65,176 -15,300
10,615 24,101 -13,486
22,411 10,888 11,523
16,384 29,395 -13,011
466 793 -327
447,847 365,383 82,462
13,134 35,671 -22,537
2,201 3,161 -960
10,933 32,510 -21,577
1,929 11,229 -9,300
462,910 412,283 50,625
13.6

-12,146
4,194
-5,204
9,398
4,168
-20,508
-11,201
-9,307
580
11,927
39,059
170,453
44,856
6.6
-12,146
Balance on capital and
financial account
Annex
P29
376,766
400,077
72,496
29,801
11,754
29,795
1,147
449,264
40,572
3,760
36,812
16,333
506,169
104,474
80,663
-8,780
-17,783
19,398
-9,675
-721
95,694
-24,549
-1,142
-23,408
-14,633
56,511
13.3

15,083
9,739
-7,833
17,572
33,829
-28,485
-1,145
-27,340
15,083
11,467
7,997
83,061
253,513
66,714
7.9
RM m illion
2004 2005e
+ - N et + - N et
2006f
+ - N et
481,240 463,502 601,903 410,476 536,931
480,740 492,285 600,583 434,010 533,788
63,717 90,748 80,495 82,452 72,202
12,018 34,215 17,281 31,876 16,169
31,152 16,293 34,842 14,237 32,354
20,120 39,278 27,945 35,562 23,251
426 962 427 777 427
544,958 554,250 682,398 492,928 609,133
16,023 45,680 21,964 41,937 20,469
2,618 5,654 5,287 4,712 4,229
13,405 40,026 16,677 37,225 16,237
1,700 16,365 1,342 18,094 1,131
562,681 616,295 705,703 552,960 630,734
138,401
108,298
-10,253
-16,934
18,549
-11,333
-535
128,148
-23,716
-367
-23,349
-15,024
89,409
17.2
126,455
99,778
-10,249
-15,707
18,117
-12,311
-350
116,205
-21,470
-482
-20,988
-16,963
77,772
16.4

-41,952
2,711
-12,931
15,642
-11,881
-32,782
-11,064
-21,718
-41,952
-23,000
-15,496
12,820
266,334
70,483
7.8
P30
Table A.7
Principal Markets for Manufactured Exports
2001 2002 2003 2004 2005p
C ountry
ASEAN
Singapore
Thailand
Indonesia
Philippines
Brunei Darussalam
EU
1
United Kingdom
Germany
Netherlands
Others
U nited States
Japan
H ong Kong C hina
C hinese Taipei
Korea
The Peoples
Republic of C hina
A ustralia
C anada
M iddle East
2
Latin A m erican
C ountries
Rest of the W orld
Total
RM
m illion share
% RM
m illion share
% RM
m illion share
% RM
m illion share
% RM
m illion share
%
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
72,140
40,894
52,483
9,816
4,983
4,113
745
7,176
11,754
8,355
65,830
32,413
14,327
9,767
6,692
11,266
5,862
1,977
6,885
3,436
13,827
285,316
25.3
18.4
3.4
1.8
1.4
0.3
14.3
2.9
2.5
23.1
4.1
11.4
5.0
3.4
2.3
3.9
2.1
0.7
2.4
1.2
4.9
100.0
26.2
18.5
4.1
1.9
1.4
0.3
12.7
2.6
2.3
4.1
23.9
9.4
6.3
3.7
2.6
4.6
2.0
0.7
2.0
1.0
4.9
100.0
82,481
57,367
13,552
6,291
4,346
925
41,077
8,131
8,053
14,580
74,918
28,683
24,717
11,610
7,123
17,376
7,116
2,132
7,485
2,939
18,665
326,322
25.3
17.6
4.2
1.9
1.3
0.3
12.6
2.5
2.5
4.4
23.0
8.8
7.6
3.6
2.2
5.3
2.2
0.7
2.3
0.9
5.5
100.0
78,981
869
38,505
302,021
12,319
55,917
7,836
7,071
13,609 4.8 3.7 10,313 3.2
99,180
65,800
17,500
8,945
5,993
942
51,523
9,678
9,248
20,138
85,484
33,341
27,482
11,766
9,178
22,134
9,531
2,754
10,565
4,154
23,357
390,449
12,459
25.4
16.9
4.5
2.3
1.5
0.2
13.2
2.5
2.4
5.1
21.9
8.5
7.0
3.0
2.4
5.7
2.4
0.7
2.7
1.1
6.0
100.0
3.2
25.8
17.2
5.0
2.2
1.2
0.2
12.4
2.0
2.3
4.9
23.3
7.4
7.0
2.4
2.2
6.0
2.5
0.6
3.0
1.1
6.3
100.0
3.2 11,085
12,513
14,041
5,951
1,992
72,116
28,271
19,147
11,216
7,797
5,992
3,031
14,981
5,627
4,249
1
Includes the 10 new m em ber states since 2004
2
Beginning 2004, C yprus has been excluded from M iddle East as it has been included under the EU countries
p Prelim inary
9,992
10,591
12,901
110,946
73,872
21,300
9,482
53,457
8,652
21,011
31,743
30,127
10,247
9,308
25,728
2,555
4,641
27,584
429,873
13,802
5,287
1,005
100,045
Annex
P31
Table A.8
Principal Export Markets for Electronics
2004 2001 2002 2003 2005p
C ountry
U nited States
Singapore
C hinese Taipei
Japan
Hong Kong China
O thers
Total
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
41,969 26.7 34,793 24.9 45,285 27.1
33,000 21.0 30,335 21.7 32,042 19.1
7,670 4.9 6,520 4.7 8,056 4.8
11,226 7.1 13,502 9.7 10,465 6.3
12,641 8.0 7,470 5.3 18,005 10.8
20,031 12.7 19,684 14.1 22,333 13.2
157,401 100.0 139,632 100.0 167,381 100.0
7,838 5.0 6,012 4.3 9,002 5.4
51,912 27.5
33,466 17.7
6,873 3.6
11,213 5.9
Thailand
6,921 4.4 4,802 3.4 7,147 4.3 8,297 4.4
19,606 10.4
28,745 15.4
188,605 100.0
10,802 5.7
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
p Prelim inary
N etherlands
7,746 4.9 9,199 6.6 7,056 4.2 8,079 4.3
G erm any
3,804 2.4 3,453 2.5 4,535 2.7 5,176 2.7
Korea
4,555 2.9 3,862 2.8 3,455 2.1 4,436 2.4
64,555 31.0
35,049 16.8
5,399 2.6
10,273 4.9
9,343 4.5
21,649 10.4
29,603 14.3
208,232 100.0
13,183 6.3
9,846 4.7
5,153 2.5
4,179 2.0
The People's
Republic of C hina
Table A.9
Principal Export Markets for Electrical Products
2004 2001 2002 2003 2005p
16,354 29.5 17,324 28.6 17,430 31.7
8,340 15.0 8,120 13.4 7,443 13.6
1,115 2.0 1,128 1.9 1,137 2.1
6,758 12.2 9,207 15.2 7,584 13.8
2,398 4.3 2,534 4.2 2,483 4.5
15,338 27.6 17,161 28.1 14,272 26.0
Total 55,470 100.0 60,675 100.0 54,897 100.0
1,430 2.6 1,865 3.1 1,410 2.6
1,643 3.0 1,566 2.6 1,558 2.8
2,094 3.8
18,134 26.5
10,552 15.4
1,420 2.1
7,602 11.1
2,534 3.7
21,170 30.9
68,446 100.0
1,820 2.7
2,271 3.3
2,943 4.3
19,005 25.5
13,091 17.6
1,827 2.5
7,542 10.1
2,987 4.0
21,998 29.5
74,547 100.0
2,188 2.9
2,544 3.4
3,365 4.5 1,770 2.9 1,580 2.9
U nited States
Singapore
A ustralia
Japan
Hong Kong China
O thers
G erm any
Thailand
C ountry
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
p Prelim inary
The People's
Republic of C hina
P32
Table A.10
Principal Export Markets for Chemicals and Chemical Products
2001 2002 2003 2004 2005p
Singapore
1,646 11.1 1,736 10.1
H ong Kong C hina
1,176 7.9 1,239 7.2
Japan
1,566 10.5 1,750 10.2
Korea
511 3.4 546 3.2
C hinese Taipei
620 4.2 882 5.1
Thailand
1,164 7.8 1,387 8.0
Indonesia
999 6.7 1,302 7.6
The Peoples
Republic of C hina
1,533 10.3 2,294 13.3 2,930 13.8
2,158 10.2
2,105 9.9
1,771 8.4
1,549 7.3
1,531 7.2
766 3.6
960 4.5
5,513 26.1
21,200 100.0
4,019 14.5
2,581 9.3
2,983 10.7
2,339 8.4
1,847 6.7
2,232 8.0
1,174 4.2
1,337 4.8
7,184 26.0
27,767 100.0
O thers
4,070 27.4 4,552 26.3
Total 14,879 100.0 17,228 100.0
C ountry RM
m illion share
% RM
m illion share
% RM
m illion share
% RM
m illion share
% RM
m illion share
%
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
p Prelim inary
India
376 2.5 498 2.9 858 4.0 1,089 3.9
U nited States
1,218 8.2 1,042 6.1 1,059 5.0 982 3.5
4,001 13.5
2,834 9.5
3,005 10.1
2,715 9.1
2,102 7.1
2,459 8.3
1,305 4.4
1,143 3.8
7,616 25.7
29,718 100.0
1,435 4.8
1,103 3.7
Table A.11
Principal Export Markets for Manufactures of Metal
2001 2002 2003 2004 2005p
C ountry
Singapore
U nited States
Japan
The Peoples
Republic of C hina
Thailand
Indonesia
H ong Kong
A ustralia
O thers
Total
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
p Prelim inary
24.3
476
23.2 2,134 20.1 2,255
9.0 1,015
7.4 833
4.9 550
6.3 706
3.9 442
7.4 486
8.5 594
5.5 665
5.8 504
4.1 398
3.4 249
39.3 3,398
644
736
2,020
501
360
295
3,420
5.5
6.8
7.6
5.7
4.5
3.6 400
3.3 366
41.5 4,675
100.0 11,242
18.9 3,057
5.7 918
6.6 1,070
8.3 1,340
7.9 1,269
3.7 590
3.1 505
5.8 929
40.0 6,462
100.0 16,140
18.2 3,120
7.0 1,209
12.7 2,173
7.1 1,213
5.5 945
4.9 845
3.8 646
6.1 1,045
34.7 5,961
100.0 17,157
2.8 368 240 4.2
2.8
38.6
8,692 8,796 100.0 100.0
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
Annex
P33
2001 2002 2003 2004 2005p
C ountry
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
Table A.12
Principal Export Markets for Optical and Scientific Equipment
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
p Prelim inary
U nited States
Singapore
Japan
N etherlands
The People's
Republic of C hina
Thailand
G erm any
O thers
Total
2,132
1,110
1,163
415
232
173
437
2,140
7,802
27.3
14.2
14.9
5.3
3.0
2.2
5.6
27.5
100.0
1,874
1,573
1,186
511
199
172
408
2,229
8,152
23.0
19.3
14.5
6.3
2.4
2.1
5.0
27.4
100.0
1,983
1,752
1,380
642
451
243
404
2,301
9,156
21.7
19.1
15.1
7.0
4.9
2.7
4.4
25.1
100.0
2,428
2,203
2,106
877
567
295
397
2,695
11,568
21.0
19.0
18.2
7.6
4.9
2.5
3.4
23.4
100.0
2,755
1,673
1,832
852
982
814
508
2,902
12,318
22.4
13.6
14.9
6.9
8.0
6.6
4.1
23.5
100.0
Table A.13
Principal Export Markets for Petroleum Products
2001 2002 2003 2004 2005p
C ountry
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
RM
m illion
%
share
Singapore
39.9
Indonesia
459
34.6 3,043 38.2 3,605
2.5 239
19.5 1,836
2.9 275
4.3 407
5.6 525
270
3.3 188
11.8 1,001
5.5 260
2.4 188
11.0 412
257
27.0 2,271
276
991
2,906
201
921
2,288
2.5
Japan
13.1
The Peoples
Republic of C hina
3.4
A ustralia
2.5
5.4
2.9
24.1 2,278
100.0 9,435
40.2 5,392
2.6 351
14.2 1,905
7.3 977
3.4 459
4.8 642
663 4.9
22.6 3,032
100.0 13,421
57.8 9,671
2.9 484
10.3 1,729
3.4 563
3.8 635
2.3 382
521 3.1
16.4 2,744
100.0 16,729
4.4 366
U nited States
3.4
H ong Kong C hina
29.8
O thers
Total 8,408 7,620 100.0 100.0
Source: D epartm ent of Statistics, M alaysia and Bank N egara M alaysia
p Prelim inary
P34
Table A.14
Export Prices of Major Commodities
2001 2002 2003 2004 2005p 2002 2003 2004 2005p
A nnual change (% )
Palm oil (RM /tonne)
Rubber (sen/kg)
Saw logs (RM /cu. m etre)
C rude oil (U SD /barrel)
Saw n tim ber
(RM /cu. m etre)
Source: D epartm ent of Statistics, M alaysia
p Prelim inary
Liquefied natural gas
(RM /tonne)
5.5
24.3
34.8
6.8
18.3
41.0
22.0
17.1
44.8
17.0
-2.9
-8.6
1,617
379
30
772
1,367
269
25
659
944
230
26
721
1,706
470
41
824
1,456
513
56
947
-14.6
9.0
-10.4 2.9 16.9 1,134 1,102 943 1,015 1,099 8.3
36.5
15.0
8.9 1.8 13.9 365 359 315 398 428 7.7
8.9
3.4
0.8
20.0
13.2
13.2
7.8
1.5
0.8
2.3
14.0
0.8
1.9
2.2
1.7
19.9
100.0
0.8
9.8
4.0
0.7
17.9
15.4
13.6
7.8
2.1
0.9
1.6
13.3
1.1
2.5
2.1
2.0
17.6
1.2
100.0
10.9
3.6
0.8
13.0
19.7
15.4
9.8
1.1
1.0
2.0
11.8
1.0
2.0
1.7
2.3
17.8
1.5
100.0
1,143
379
82
1,364
2,066
1,610
1,028
116
100
211
1,236
101
208
178
241
1,858
10,466
155
1,059
434
80
1,940
1,670
1,478
847
225
102
177
1,449
120
270
230
218
1,909
10,857
127
1,105
430
103
2,502
1,650
1,648
975
185
106
284
1,749
97
231
272
211
2,489
12,487
98
Table A.15
Principal Export Markets for Palm Oil
2004 2001 2002 2003 2005p 2004 2001 2002 2003 2005p
('000 tonnes) % share
The People's
Republic of C hina
Pakistan
India
European U nion
1
Netherlands
Germany
Sweden
Others
M iddle East
A ustralia
Japan
U nited States
Bangladesh
C hinese Taipei
Korea
O thers
Total
Source: D epartm ent of Statistics, M alaysia
p Prelim inary
C ountry
Italy
1
Includes 10 new m em ber states in 2004
11,788 100.0 100.0 13,073
2,097 17.9 21.8 2,867
96 0.8 0.8 105
228 1.9 1.7 223
474 4.0 3.4 438
141 1.2 1.9 246
298 2.5 4.1 534
353 3.0 3.7 485
838 7.1 7.1 928
2,829 24.0 22.1 2,885
1,862 15.8 16.3 2,135
1,135 9.6 10.4 1,364
149 1.3 1.4 180
119 1.0 1.2 155
114 1.0 0.8 103
345 2.9 2.5 333
1,647 14.0 12.0 1,563
925 7.8 5.1 664
Annex
P35
Table A.16
Principal Export Markets for Rubber
('000 tonnes) % share
Source: D epartm ent of Statistics, M alaysia
p Prelim inary
C ountry
2002 2002 2001 2001 2004 2004 2005p 2003 2003 2005p
1
The People's
Republic of C hina 85 129 207 289 386 10.4 13.9 21.9 26.1 34.2
European U nion
1
318 309 306 353 320 38.7 33.3 32.3 32.0 28.3
Germany 119 119 129 147 132 14.4 12.8 13.6 13.3 11.7
France 31 41 40 53 46 3.8 4.4 4.2 4.8 4.1
Netherlands 12 15 12 20 28 1.4 1.7 1.3 1.8 2.5
Italy 30 28 29 29 24 3.7 3.1 3.0 2.6 2.1
United Kingdom 25 24 22 24 21 3.0 2.5 2.4 2.2 1.9
Spain 14 17 17 24 13 1.7 1.9 1.8 2.2 1.2
Others 87 65 57 56 56 10.7 6.9 6.0 5.1 4.8
M iddle East 95 81 84 90 75 11.5 8.7 8.9 8.1 6.6
Iran 60 45 48 55 40 7.3 4.8 5.1 4.9 3.6
Turkey 24 24 25 24 24 2.9 2.6 2.6 2.2 2.2
Others 11 12 11 11 11 1.3 1.3 1.2 1.0 0.8
Korea 58 59 69 64 74 7.0 6.4 7.3 5.8 6.6
U nited States 66 81 76 74 67 8.0 8.7 8.0 6.7 6.0
Brazil 25 41 29 37 31 3.0 4.4 3.1 3.3 2.7
C anada 16 28 14 19 17 1.9 3.0 1.5 1.7 1.5
Singapore 5 9 9 22 10 0.6 1.0 0.9 2.0 0.9
O thers 154 191 152 157 148 18.9 20.6 16.1 14.3 13.2
Total 822 928 946 1,105 1,128 100.0 100.0 100.0 100.0 100.0
100.0
22.0
24.6
22.6
14.1
0.9
2.4
1.6
11.8
5,207
1,146
1,278
1,178
736
47
126
86
610
2004 2001 2002 2003 2005p 2004 2001 2002 2003 2005p
Total 4,834 5,104 5,532 100.0 100.0 100.0
Table A.17
Principal Export Markets for Saw Logs
('000 cubic m etres) % share
C ountry
Source: D epartm ent of Statistics, M alaysia
p Prelim inary
1,071 1,106 24.2 22.2 21.7 1,336
The People's
Republic of C hina
1,375 1,641 24.5 28.4 32.2 1,356 Japan
985 998 24.7 20.4 19.5 1,369 India
669 651 12.5 13.8 12.7 694 C hinese Taipei
417 188 1.9 8.6 3.7 103 H ong Kong C hina
175 159 2.5 3.6 3.1 140 Korea
29 39 1.1 0.6 0.8 60 Thailand
113 322 8.6 2.4 6.3 474 O thers
5,759
1,630
1,098
1,448
745
23
117
76
622
100.0
28.3
19.1
25.1
12.9
0.4
2.0
1.3
10.9
P36
2004 2001 2002 2003 2005p 2004 2001 2002 2003 2005p
C ountry
Table A.18
Principal Export Markets for Sawn Timber
(000 cubic m etres) % share
p Prelim inary
Source: D epartm ent of Statistics, M alaysia
Thailand 534 589 660 781 851 22.2 21.4 23.7 24.7 23.1
The Peoples
Republic of C hina 151 159 193 209 614 6.3 5.8 6.9 6.6 16.7
C hinese Taipei 170 187 209 227 225 7.0 6.8 7.5 7.2 6.1
N etherlands 197 186 204 200 187 8.2 6.8 7.3 6.3 5.1
Japan 187 194 167 172 170 7.8 7.1 6.0 5.4 4.6
Singapore 185 155 165 246 160 7.7 5.6 5.9 7.8 4.3
U nited A rab Em irates 66 64 55 79 88 2.7 2.3 2.0 2.5 2.4
Korea 120 98 85 89 70 5.0 3.6 3.1 2.8 1.9
Republic of Yem en 83 68 78 106 68 3.4 2.5 2.8 3.4 1.8
H ong Kong C hina 135 149 107 81 67 5.6 5.4 3.8 2.6 1.8
A ustralia 20 40 40 44 63 0.8 1.5 1.4 1.4 1.7
Belgium 52 64 72 69 58 2.2 2.3 2.6 2.2 1.6
U nited Kingdom 52 53 51 47 47 2.2 1.9 1.8 1.5 1.3
Italy 25 37 62 40 33 1.0 1.3 2.2 1.3 0.9
O thers 434 710 641 776 984 17.9 25.7 23.0 24.3 26.7
Total 2,411 2,753 2,789 3,166 3,685 100.0 100.0 100.0 100.0 100.0
Annex
P37
18,686
3,024
1,051
1,316
4,345
1,548
420
205
676
682
166
3,081
888
100.0
16.2
5.6
7.0
23.3
8.3
2.2
1.1
3.6
3.6
0.9
16.5
4.8
100.0
17.3
8.0
7.1
12.5
7.2
2.4
2.3
3.4
5.2
1.8
19.0
2.6
100.0
14.6
13.2
11.4
10.4
5.9
3.0
3.7
3.2
2.5
5.0
15.2
1.3
100.0
18.6
9.7
14.5
12.3
5.0
2.7
3.2
2.4
4.7
8.7
11.2
1.4
17,913
3,097
1,440
1,271
2,248
1,290
425
412
610
937
306
3,396
468
16,192
2,358
2,131
1,838
1,687
956
485
604
511
412
822
2,462
203
15,077
2,797
1,457
2,190
1,852
753
400
487
362
704
1,332
1,690
215
2004 2001 2002 2003 2005p 2004 2001 2002 2003 2005p
Total
C ountry
Table A.19
Principal Export Markets for Crude Oil
(000 tonnes) % share
Source: D epartm ent of Statistics, M alaysia
p Prelim inary
100.0
Thailand 18.8
Japan 4.0
Korea 7.6
A ustralia 20.9
Indonesia 7.9
Sri Lanka 2.0
N ew Zealand 1.6
Philippines 4.1
U nited States 1.7
O thers 0.5
India 20.6
Singapore 9.0
18,223
734
1,389
3,817
1,431
358
299
743
314
92
3,750
3,418
1,638
1,284 6.9 11.2 10.6 5.6 2,013 1,723 838
The Peoples
Republic of C hina 1.3 240
Source: D epartm ent of Statistics, M alaysia
Table A.20
Principal Export Markets for LNG
2001 2002 2003 2004 2001 2002 2003 2004
(000 tonnes) % share
Japan
Korea
C hinese Taipei
O thers
Total
p Prelim inary
C ountry
15,423 15,007 100.0 100.0 100.0 100.0 17,311 20,729
U nited States
11,308 10,782 73.3 71.8
2,256 2,303 14.6 15.4
1,860 1,857 12.1 12.4
0.4
72.1
15.4
12.2

61.4
22.4
12.7
2.1 65
12,491
2,658
2,108
12,724
4,643
2,623
440
0.3 1.4 54 299
P38
10.5
12.9
76.6
6.3
1.3
3.0
6.4
2.0
1,883
3,287
6,150
979
13,896
5,140
3,190
22,226
29,309
6,854
12,437
10,019
-7,083
-3,664
-7,297
3,877
56,417
59,535
37,284
153,236
33,500
23,321
186,736
28,627
3,861
10,017
7,976
21,854
7.5
14.5
100.0
78.0
6.7
0.5
2.9
6.9
3.2
1,150
3,574
6,346
1,621
13,209
11,311
7,030
31,550
22,323
735
10,447
11,141
9,227
6,295
865
2,068
24,072
11,926
173,419
26,954
735
7,886
10,991
19,612
8.4
14.3
100.0 100.0
77.3
6.5
1.0
2.5
6.7
3.0
1,692
3,430
6,297
1,174
9,732
3,655
10,465
23,853
23,104
2,445
6,942
13,717
749
8,020
-3,287
-3,985
52,612
64,330
36,283
153,225
57,604
67,415
24,328
149,346
32,435
21,894
185,660
27,832
2,445
6,942
11,393
20,780
4.4
0.5
2.5
4.6
1.5
1,758
2,684
5,442
1,000
12.8
14,383
11,545
100.0
1,136
27,064
25,172
1,015
12,645
11,512
1,892
120
-1,100
2,872
59,951
62,244
34,654
156,849
76.8
43,737
35,333
200,586
24,866
1,015
10,713
6,947
18,675
10.4
Table A.21
External Debt and Debt Servicing
2004 2001 2002 2003
RM m illion
Medium- and long-term debt:
Gross borrowing
Federal Government
NFPEs
Private sector
Repayment and prepayment
Federal Government
NFPEs
Private sector
Net borrowing
Federal Government
NFPEs
Private sector
Outstanding debt
Federal Government
NFPEs
Private sector
Currency composition (% share)
US dollar
Japanese yen
Others
Short-term debt:
Outstanding debt
Banking sector
1
Total external debt:
Interest payment
Federal Government
NFPEs
Private sector
Debt service ratio (% of exports of
goods and services)
Total debt
M edium - and long-term debt
Federal Government
NFPEs
Private sector
Total servicing (including short-term
interest payment)
of w hich:
M edium - and long-term debt
Repayment (excluding prepayment)
Federal Government
NFPEs
Private sector
N ote: N um bers m ay not necessarily add up due to rounding
Source: M inistry of Finance and Bank N egara M alaysia
0.6 7.7 7.1 7.4 Annual change (%)
49,141 45,636 48,858 52,786 Total external debt (USD million)
50.1 56.2 55.1 47.2 % GNP
8,404 10,179 12,147 10,541 Non-bank private sector
Annex
P39
Table A.22
Consumer Price Index (2000=100) Sub-groups of Food
W eights
(% )
2002 2003
A nnual change (% )
Food 33.8 0.7
of w hich:
Food at H om e 24.1 0.2
Rice, bread and other cereals 5.5 0.1
M eat 3.4 -1.3
Fish 4.9 1.0
M ilk and eggs 2.1 1.0
O ils and fats 0.8 1.8
Fruits and vegetables 5.0 0.2
Sugar 0.5 -1.9
C offee and tea 0.8 0.4
O ther foods 1.1 0.3
Food aw ay from hom e 9.7 2.0
1.3
1.6
0.4
2.4
1.3
2.2
4.4
2.5
0.2
1.6
0.5
0.7
2004
2.2
2.3
0.7
4.3
3.3
2.6
2.3
1.5
0.2
2.1
1.3
2.1
2005
3.6
3.9
1.5
8.6
4.5
4.6
0.0
4.5
0.3
1.5
0.8
3.1
Source: D epartm ent of Statistics, M alaysia
2003
5.7
-0.2
0.9
7.5
11.4
15.7
1.4
1.8
6.8
0.8
0.1
0.9
0.5
2002
4.4
0.4
3.9
7.0
0.0
46.5
-0.7
-0.2
5.7
-0.3
-0.3
2.6
-0.7
Table A.23
Producer Price Index (1989=100)
D om estic Econom y
of w hich:
Food and live anim als chiefly for food
Beverages and tobacco
C rude m aterials, inedible except fuels
M ineral fuels, lubricants and
related m aterials
A nim al and vegetable oils and fats
C hem icals and related products
M anufactured goods
M achinery and transport equipm ent
M iscellaneous m anufactured articles
O ther com m odities and transactions
Local Production
Im port
Source: D epartm ent of Statistics, M alaysia
W eights
(% )
A nnual change (% )
100.0
14.9
2.1
18.0
18.8
8.5
4.4
10.8
79.3
20.7
18.4
3.6
0.6
2004
8.9
3.6
1.6
6.6
22.3
13.2
4.3
2.5
10.3
2.0
0.1
0.6
0.2
2001
-5.0
0.4
1.8
-5.9
-10.6
-17.6
-1.1
-0.5
-6.1
-0.1
-0.6
10.3
-0.3
2005
6.8
26.0
2.2
3.8
1.9
3.0
-14.8
2.5
0.6
1.8
0.0
7.9
1.5
P40
Table A.24
Labour Market: Selected Indicators
2001 2002 2003 2004 2005e
(num ber of positions/persons)
1
Refers to new vacancies reported by em ployers through the Electronic Labour Exchange
2
Since 2004, classification of vacancies by occupational groups is based on the M alaysia Standard C lassification of O ccupation
(M A SC O ) 1998. A s such, vacancies data prior to 2004 have been adjusted to best m atch the new classification for ease of com parison
3
Refers to the placem ents reported by em ployers through the Electronic Labour Exchange
e Estim ates
Source: M inistry of H um an Resources and Econom ic Planning U nit
Vacancies
1
By industry:
A griculture, hunting, forestry and fishery 36,234 43,805 29,048 1,373 40,438
M ining and quarrying 217 321 121 41 150
M anufacturing 60,471 75,655 34,977 17,769 112,542
C onstruction 13,834 19,001 13,818 3,505 48,524
Services 20,703 24,005 18,954 18,624 63,441
Electricity, gas and water supply 171 326 499 198 859
Wholesale and retail trade, hotels and restaurants 8,022 9,472 7,359 5,221 23,921
Transport, storage and communication 2,749 2,378 1,459 1,046 3,892
Finance, insurance, real estate and
business services 3,938 4,874 4,079 6,162 13,874
Public administration, defence and
compulsory social security 5,823 6,955 5,558 1,224 2,497
Community, social and personal service activities 4,773 18,398
O thers not elsew here classified 8,663 39,405
Total vacancies 131,459 162,787 96,918 49,975 304,500
By occupational groups
2
:
Legislators, senior officials and m anagers 1,661 1,789
Professionals 5,020 8,575 5,071 5,187 17,285
Technicians and associate professionals 6,848 11,725
C lerical w orkers 8,914 9,660 7,540 11,799 15,885
Service w orkers, shop and m arket sales w orkers 6,549 7,213 5,747 4,627 26,038
Skilled agricultural and fishery w orkers 23,084 34,424 18,196 624 14,935
C raft and related trades w orkers 1,134 18,793
Plant and m achine operators and assem blers 87,892 102,915 60,364 9,332 52,740
Elem entary occupations 8,763 145,310
Total vacancies 131,459 162,787 96,918 49,975 304,500
Job placements
3
by industry:
A griculture, hunting, forestry and fishery 235 246 142 419 131
M ining and quarrying 120 93 36 8 7
M anufacturing 7,461 8,259 6,646 2,812 6,620
C onstruction 1,560 1,664 1,451 234 590
Services 8,571 9,015 7,992 1,872 5,290
Electricity, gas and water supply 99 99 113 28 51
Wholesale and retail trade, hotels and restaurants 3,356 3,187 3,141 722 1,809
Transport, storage and communication 825 693 545 142 379
Finance, insurance, real estate and
business services 2,017 2,086 1,911 495 903
Public administration, defence and
compulsory social security 2,274 2,950 2,282 141 550
Community, social and personal service activities 344 1,598
O thers not elsew here classified 837 4,821
Total placements 17,947 19,277 16,267 6,182 17,459
Unemployment rate
(% of labour force) 3.6 3.5 3.6 3.5 3.5
Annex
P41
Year
1996
1997
378,186 93.9 331,747 69.2
1998
1,378,989 92.7 1,658,174 77.7
1999
1,606,986 80.3 499,085 67.4
2000
768,633 82.1 97,960 75.7
2001
763,926 78.6 209,870 73.9
2002
456,352 77.7 115,128 75.4
2003
374,750 78.3 210,657 78.2
80.5 78.0 169,548 507,637
2004 82.1 248,328 79.6 319,441
Table A.25
New Supply of Purpose-Built Office Space and Retail Space in Malaysia
O ffice Space Retail Space
Square
m etres
O ccupancy
rate
1
(% )
O ccupancy
rate
1
(% )
Square
m etres
1
p Prelim inary
Source: N A PIC , Valuation and Property Services D epartm ent
14.3
0.9
-6.7
0.0
2.2
Year
Table A.26
Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley
1
Prim e O ffice Space Prim e Retail Space
RM /sq.m
A nnual
change (% )
A nnual
change (% )
RM /sq.m
2000 48 194
2001 48 215
2002
2003
45 226
45 226
2004 46 242
10.9
11.0
5.0
0.0
7.1
1
Refers to Kuala Lum pur and Selangor
Source: C H W illiam s Talhar & W ong Sdn. Bhd.
P42
Table A.27
Broad Money (M3)
A nnual change
A s at end-
2005
2001 2002 2003 2004
RM m illion
Broad m oney (M 3)
1
13,022 31,607
C urrency
2
-92 1,751
D em and deposits 2,882 6,718
Broad quasi-m oney 10,232 23,138
Fixed deposits -358 12,648
Savings deposits 4,454 5,590
NIDs 600 3,575
Repos 4,186 2,507
Foreign currency deposits 1,350 -1,182
Factors Affecting M3
N et claim s on G overnm ent -1,542 11,538
Claims on Government 4,165 -867
Less: Government deposits 5,707 -12,405
C laim s on private sector 20,335 27,737
Loans 17,081 19,288
Securities 3,255 8,449
N et external operations 6,741 1,237
Bank Negara Malaysia
3
7,722 7,564
Banking system -980 -6,327
O ther influences -12,513 -8,905
48,524
2,233
11,210
35,082
17,065
5,602
1,965
8,016
2,434
67,990
2,594
10,086
55,311
24,668
6,129
8,179
13,337
2,998
12,949
3,960
-8,989
31,287
21,468
9,819
20,748
27,131
-6,383
-16,460
667,327
30,166
96,116
541,044
356,925
70,534
31,941
63,773
17,871
-12,830
35,193
48,023
642,369
560,106
82,263
236,008
241,485
-5,477
-198,221
1
Excludes interplacem ents am ong banking institutions
2
Excludes holdings by banking system
3
Includes exchange rate revaluation loss/gain
-15,921
4,536
20,457
30,602
39,753
-9,151
81,970
75,042
6,898
-28,661
2005
49,688
1,629
8,650
39,409
4,949
1,947
12,785
17,260
2,467
-5,474
-2,250
3,225
45,422
45,004
418
16,486
28,317
-11,830
-6,747
Annex
P43
2001 13,022 2.9 7,810 2.2 2,512 3.2 -115 -0.5 2,627 4.7 5,298 1.9 5,213 5.1
Table A.28
Money Supply: Annual Change and Growth Rates
M 3
5
M 2
3
M 1
1
D eposits
w ith other
banking
institutions
4
D em and
deposits
N arrow
quasi-m oney
2
Total Total Total C urrency
RM m RM m RM m RM m RM m RM m RM m % % % % % % %
2002 31,607 6.7 21,030 5.8 8,344 10.3 1,749 7.9 6,595 11.3 12,686 4.5 10,576 9.9
2003 48,524 9.7 42,519 11.1 13,032 14.6 2,205 9.2 10,827 16.6 29,487 10.0 6,005 5.1
1
C urrency in circulation and dem and deposits of the private sector
2
C om prising savings and fixed deposits, negotiable instrum ents of deposits (N ID s), repos and foreign currency deposits of the
private sector placed w ith com m ercial banks and Islam ic banks
3
M 1 plus narrow quasi-m oney
4
C om prising fixed deposits and repos of the private sector placed w ith finance com panies, m erchant banks and discount
houses. A lso includes saving deposits w ith finance com panies, negotiable instrum ents of deposits (N ID s) w ith finance
com panies and m erchant banks, foreign currency deposits placed w ith m erchant banks and call deposits w ith discount
houses. Excludes interplacem ent am ong the banking institutions
5
M 2 plus deposits placed w ith other banking institutions
2005 49,688 15.4 1,561 5.5 72,261 -32,328 -38.7 8.0 17.2 9.6 8.5 9,755 82,015
2004 67,990 25.4 2,516 9.7 95,937 -40,112 -32.5 12.4 29.6 12.7 11.9 12,164 108,102
8,194
9,649
P44
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Annex
P45
116.3
8.7
101.6
20.8
60.6
75.3
16.7
56.7
-31.9
32.1
24.6
18.5
4.1
96.8
5.6
75.4
4.4
31.4
52.7
18.5
69.1
15.7
36.8
32.3
-16.4
-4.5
Table A.30
2003 2002 2004 2005e
RM billion
Revenue
1
% growth
O perating expenditure
% growth
C urrent surplus of N FPEs
2
Current balance
% of GDP
N et developm ent expenditure
3
% growth
Overall balance
% of GDP
G eneral governm ent
4
N FPEs
Source: M inistry of Finance and non-financial public enterprises (N FPEs)
Consolidated Public Sector Finance
1
Excludes transfers w ithin general governm ent
2
Refers to 30 N FPEs in 2004 and 2005; 34 in 2003
3
A djusted for transfers and net lendings w ithin public sector
4
C om prises Federal G overnm ent, state governm ents, statutory bodies and local governm ents
e Estim ate
f Forecast
N egligible
N ote: N um bers m ay not add up due to rounding
107.1
10.6
84.2
11.5
41.2
64.1
16.2
83.3
20.5
43.2
40.2
-19.2
-4.9
122.6
5.4
108.4
6.6
63.8
78.0
15.8
71.0
25.1
31.0
40.0
7.0
1.4
2006f
134.3
9.6
112.5
3.7
63.8
85.6
15.8
71.0

39.4
31.5
14.7
2.7
Annex
Key Economic and
Financial Statistics
P46
2004 2001 2002 2003 2005e 2006f
A nnual change (% )
U nited States
Japan
Euro A rea
Germany
U nited Kingdom
U nited States
Japan
Euro A rea
Germany
U nited Kingdom
U nited States
Japan
Euro A rea
Germany
U nited Kingdom
U nited States
Japan
Euro A rea
Germany
U nited Kingdom
1

INFLATION
Major Industrial Countries
% of labour force
UNEMPLOYMENT
Major Industrial Countries
% of G D P
CURRENT ACCOUNT BALANCE
Major Industrial Countries
FISCAL BALANCE
Major Industrial Countries
U nited States
Japan
G erm any
U nited Kingdom
1
Based on Eurostat's harm onised index of consum er prices
e Estim ate
f Forecast
1.9 1.2 1.5 3.3
2.7 0.8 1.6 4.2
1.8 0.4 0.1 2.3
0.7 1.7 0.9 2.1
-0.2 1.2 0.1 1.6
2.5 2.2 2.0 3.2
1.8 2.1 1.5 2.0
2.3 2.8 1.6 2.7
-0.3 -0.7 -0.9 0.0
2.1 2.3 2.3 2.1
1.0 1.9 1.4 1.8
1.4 1.2 1.3 1.3
2.6
3.3
2.5
1.7
1.2
2.0
2.0
2.8
0.0
1.8
1.7
1.9
6.0 5.2 4.7 5.8 5.5
5.2 4.1 5.0 5.4 4.7
8.7 8.4 7.9 8.3 8.9
9.6 9.3 7.9 8.7 9.2
5.0 4.8 5.1 5.2 4.8
-4.7 -6.7 -3.8 -4.5 -5.7
3.2 3.0 2.2 2.9 3.8
0.3 0.2 0.1 0.7 0.5
2.1 4.4 0.2 2.2 3.8
-1.5 -1.8 -2.2 -1.6 -2.0
-3.4 -2.9 0.5 -2.4 -3.1
-7.1 -6.7 -6.3 -6.9 -7.0
-1.8 -2.1 -1.3 -1.7 -2.3
-3.5 -3.5 0.9 -1.6 -3.0
2.6
3.5
2.8
1.3
0.9
1.8
2.2
3.4
-0.3
2.2
2.1
2.0
5.1
4.4
8.6
9.1
4.7
-6.4
3.6
0.3
4.3
-1.9
-2.6
-6.9
-2.1
-3.2
Table A.31
Major Industrial Countries: Key Economic Indicators
REAL GDP
Major Industrial Countries
Source:IMF World Economic Outlook, September 2005; OECD Economic Outlook No.78
Annex
P47
3.1
2.7
2.3
0.5
1.1
3.0
4.6
10.4
7.6
1.8
3.4
3.6
1.6
1.7
-0.4
1.4
2.7
6.1
6.0
3.9
3.6
-0.3
0.5
-2.6
1.2
1.8
6.8
3.5
1.2
2.1
6.1
2.0
4.3
25.7
10.3
15.7
-2.5
-0.4
2.7
1.2
4.2
4.1
6.1
26.1
9.8
12.6
4.5
1.8
3.4
3.2
2.0
10.2
29.2
10.3
12.8
5.6
5.8 1.9 Philippines
-6.6
-1.8
-5.0
-5.5
-2.4
-2.3
-4.0
-3.1
1.6
7.2
9.9
4.0
4.1
6.4
7.3
5.3
4.5
5.6
-1.7
-1.1
0.2
0.3
-3.8
-2.8
-0.5
-2.7
7.9
10.1
4.6
6.1
8.7
8.6
7.1
6.2
5.1
-2.0
-0.1
1.7
-4.3
-1.5
-1.4
-3.9
-1.7
6.9
9.1
7.0
4.3
4.0
1.8
4.4
5.3
4.4
1.3
2.7
-0.2
-0.4
-3.0
1.8
0.7
11.9
3.9
-3.0
0.1
-4.9
-5.6
-1.4
-1.7
-5.3
2.8
1.0
9.1
17.8
7.9
8.4
5.5
-3.3
4.7
8.3
3.8
-2.2
-2.3
0.6
0.3
2.2
3.8
2.4
4.1
0.0
1.0
-1.6
1.4
1.6
11.5
4.2
1.5
1.7
6.5
16.8
6.1
8.3
5.4
2003 2001 2002 2004 2005e
Annual change (%)
The People's Republic of China
Korea
Chinese Taipei
Singapore
Hong Kong China
Malaysia
Thailand
Indonesia
Korea
Chinese Taipei
Singapore
Hong Kong China
1
Malaysia
Thailand
Indonesia
CONSUMER PRICES Annual change (%)
Regional Countries
The People's Republic of China
Korea
Chinese Taipei
Singapore
Hong Kong China
Malaysia
Thailand
Indonesia
Regional Countries
The People's Republic of China
Chinese Taipei
Singapore
Hong Kong China
Malaysia
Thailand
Indonesia
Philippines
Regional Countries
CURRENT ACCOUNT BALANCE % of GDP
FISCAL BALANCE
2
% of GDP
1
Inflation refers to composite prices
2
Refers to central government balance
e Estimates
f Forecast
n.a. Not available
Source: National Sources and Bank Negara Malaysia forecast
IMF World Economic Outlook, September 2005
6.8
10.0
3.1
3.4
2.9
3.2
5.4
7.0
4.9
1.8
-2.5
-1.2
-3.3
-5.3
0.4
-1.9
-4.6
-2.8
2006f
-1.5
n.a.
-1.4
0.4
-3.5
n.a.
-0.7
-2.2
REAL GDP
Regional Countries
Table A.32
East Asia: Key Economic Indicators
7.0 ~ 7.2
9.4
5.0
4.3
4.0 ~ 6.0
4.0 ~ 5.0
6.0
4.8 ~ 5.8
5.0 ~ 5.7
0.1 0.7 3.9 Korea 1.8 0.1
1.9
5.6
1.5
4.6
22.7
10.2
16.5
-2.5
0.7
3.0 6.8 Philippines
-0.8 0.7 The People's Republic of China
3.3 ~ 3.6
3.0
1.7
0.5 ~ 1.5
2.3
3.5 ~ 4.0
3.5 ~ 5.0
7.0 ~ 9.0
8.0 ~ 8.5
3.0
5.1 6.0 4.4 1.8 Philippines 4.5 5.7 ~ 6.3
P48
Table A.33
Sources and Uses of Funds of the Financial System
2001 2002 2003 2004
RM m illion
2005p
1
Equals savings, fixed and other (N IF,LPH T,etc.) deposits + N ID s + repos.
2
Includes statutory reserves of banking institutions
3
Breakdow n of C orporate Securities betw een Private D ebt Securities (PD S) and Equities available from 2003
p Prelim inary
n.a. N ot available
Sources of Funds:
C apital, reserves and profit 123,863.2 134,871.7 148,901.8 167,017.9 176,332.3
C urrency 25,385.4 27,137.4 29,445.4 32,353.9 34,396.7
D em and deposits 92,129.0 87,539.5 92,117.8 124,333.4 135,944.1
Other deposits
1
(of which): 508,836.0 547,135.3 617,286.6 711,307.5 786,255.2
Public sector 44,971.3 44,767.7 40,563.0 38,809.9 43,593.3
Other financial institutions 102,161.7 122,405.2 161,311.5 197,022.6 219,385.4
Private sector 354,996.6 372,884.1 406,049.3 462,149.5 508,958.5
Foreign 6,706.4 7,078.4 9,362.8 13,325.4 14,318.0
Borrow ings 37,380.8 44,948.0 48,715.3 52,607.9 56,357.4
Funds from other financial institutions 68,552.4 70,836.8 87,571.5 71,717.6 84,196.2
Domestic
2
53,448.2 46,973.0 61,837.8 33,762.8 43,107.8
Foreign 15,104.2 23,863.8 25,733.6 37,954.7 41,088.4
Insurance, provident and pension funds 251,409.8 274,384.5 305,657.0 337,937.6 374,114.0
O ther liabilities 193,163.0 208,266.6 233,384.8 267,579.3 260,892.9
Total Liabilities 1,300,719.6 1,395,119.8 1,563,080.0 1,764,855.0 1,908,488.8
Uses of Funds:
C urrency 5,336.7 7,369.8 5,573.8 5,058.3 5,994.0
D eposits w ith other financial institutions 177,102.0 187,883.0 226,303.7 247,947.3 255,982.9
Domestic 156,662.9 166,670.2 211,075.6 214,355.2 229,084.0
Foreign 20,439.1 21,212.7 15,228.0 33,592.0 26,898.9
Loans and advances 528,473.7 560,459.4 599,285.5 655,668.4 721,655.2
Public sector 5,188.8 10,191.1 7,799.2 7,950.3 5,190.2
Other financial institutions 26,110.3 23,746.4 24,295.3 24,382.2 22,965.9
Private sector 494,977.2 524,393.4 564,850.9 620,712.1 690,901.8
Foreign 2,197.4 2,128.5 2,340.0 2,623.8 2,597.3
Securities 336,379.3 361,113.2 409,488.6 433,071.0 468,040.8
Treasury bills 4,063.5 5,680.0 3,539.4 445.2 1,698.4
Commercial bills 12,222.5 13,321.8 13,468.4 8,403.7 7,337.9
Malaysian Government Securities (MGS) 103,714.8 104,354.9 125,165.0 139,488.3 153,157.9
Corporate
3
207,130.1 226,671.9 254,197.9 271,630.7 290,781.7
Private Debt Securities (PDS) n.a. n.a. 122,237.8 130,213.0 140,755.3
Equities n.a. n.a. 131,960.1 141,417.7 150,026.4
Foreign 2,720.3 3,189.7 3,429.0 4,578.6 6,663.9
Others 6,528.0 7,894.9 9,688.7 8,524.5 8,401.1
G old and forex reserves 113,542.3 127,515.1 166,139.3 249,704.1 264,421.5
O ther assets 139,885.7 150,779.3 156,289.1 173,406.0 192,394.3
Total Assets 1,300,719.6 1,395,119.8 1,563,080.0 1,764,855.0 1,908,488.8
Annex
P49
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P51
Table A.36
Commercial Banks
1
: Income and Expenditure
For the financial year For the calendar year
2004 2002 2003 2003 2004 2005p
RM m illion
Interest incom e
2
34,178.6 17,471.5 19,183.1 38,762.1 41,070.5 43,381.5
Less: Interest expense 17,178.6 17,471.5 19,183.1 20,038.8 21,372.0 22,113.6
N et interest incom e 17,628.3 18,261.6 19,172.5 18,723.3 19,698.6 21,268.0
A dd: Fee-based incom e 2,951.0 3,211.9 3,925.1 3,355.3 3,878.0 4,334.1
A dd: O ther incom e 2,631.7 4,135.9 6,850.0 1,930.8 3,300.8 3,625.6
G ross operating profit 10,738.0 11,323.0 11,606.6 11,612.8 11,939.5 12,816.5
G ross operating profit after provision 10,085.4 10,680.7 10,977.0 7,762.0 7,454.1 7,414.1
Less: Loan loss and other provisions 652.6 642.3 629.6 3,850.9 4,485.4 5,402.5
Less: Staff cost 4,501.0 4,718.5 5,332.7 4,826.1 5,364.6 5,958.8
O verheads 5,340.3 5,432.1 6,158.3 5,639.7 6,272.5 6,826.7
Pre-tax profit 12,717.1 14,816.6 17,827.0 9,692.8 10,754.9 11,039.7
1
Includes finance com panies and Islam ic banks
2
Effective January 2005, banking institutions no longer accrue interests on non-perform ing loan accounts
p Prelim inary
N ote: N um bers m ay not necessarily add up due to rounding
Table A.37
Merchant Banks: Income and Expenditure
For the financial year For the calendar year
2004 2002 2003 2003 2004 2005p
RM m illion
Interest incom e
1
1,714.3 1,624.3 1,744.0 1,636.5 1,661.7 1,698.5
Less: Interest expense 1,138.7 1,081.7 1,269.7 1,145.7 1,196.0 1,265.9
N et interest incom e 575.5 542.6 474.3 490.8 465.8 432.6
A dd: Fee-based incom e 306.2 332.6 375.7 327.6 351.4 349.9
A dd: O ther incom e 306.3 519.6 412.6 398.2 550.9 1,162.0
G ross operating profit 549.9 481.4 394.5 424.3 365.1 251.3
G ross operating profit after provision 435.7 385.2 283.0 287.0 263.6 178.3
Less: Loan loss and other provisions 114.3 96.2 111.5 137.4 101.5 73.0
Less: Staff cost 214.8 263.1 295.4 260.6 297.5 350.2
O verheads 117.0 130.8 160.2 133.4 154.6 181.0
Pre-tax profit 742.0 904.8 695.6 685.2 814.4 1,340.3
1
Effective January 2005, banking institutions no longer accrue interests on non-perform ing loan accounts
p Prelim inary
N ote: N um bers m ay not necessarily add up due to rounding
P52
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1
Annex
P55
A
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B
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p
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P56
C om m ercial banks
2
2005 2001 2002 2003 2004
Table A.42
Banking System
1
: Selected Indicators
1
Based on M alaysian operations only
2
Includes finance com panies
3
C ost = Staff cost and overheads (excluding loan loss provisions)
4
Revenue = N et interest incom e + fee-based incom e + other incom e
5
Including N ID s and repos
Pre-tax profit/A verage assets (% ) 1.0 1.3 1.3 1.4 1.3
Pre-tax profit/A verage shareholders' funds (% ) 14.7 17.6 18.0 17.9 16.9
Pre-tax profit/A verage em ployee (RM '000) 72.6 98.2 112.4 123.9 124.9
C ost
3
incurred per ringgit of revenue earned
4
(sen) 40.9 42.7 43.2 42.9 43.1
C ost
3
incurred per ringgit of net interest incom e
4
(sen) 55.0 56.2 55.6 58.7 59.7
O verheads to staff cost ratio (% ) 106.3 116.0 116.4 116.7 113.5
Staff cost per em ployee (RM '000) 50.8 50.9 54.9 60.1 64.3
Loan deposit ratio
5
(% ) 93.1 92.9 89.2 85.7 82.7
Loans per office (RM m illion) 161.8 180.0 187.6 216.6 255.1
D eposits per office
5
(RM m illion) 173.7 193.8 210.3 252.8 308.3
Annex
P57
0.8 1.4 1.6 1.9 3.0 0.4 0.7 0.6 0.3 0.1 1.0 1.3 1.3 1.4 1.4
7.5 13.3 14.0 15.9 25.5 5.4 9.5 8.5 4.8 1.3 13.3 16.0 16.2 16.8 17.5
124.8 244.5 280.8 318.2 504.4 23.9 41.6 37.2 20.8 7.9 72.4 100.2 114.2 125.2 130.3
22.5 31.6 32.4 33.0 27.3 62.5 54.7 58.6 59.3 59.0 40.2 42.5 43.1 42.8 42.7
55.5 65.5 80.3 97.1 122.8 67.9 61.5 66.4 71.9 68.4 55.3 56.6 56.5 60.0 61.4
58.1 53.6 51.2 52.0 51.7 96.7 108.3 132.7 123.9 134.9 104.0 112.9 113.5 113.5 111.1
86.4 93.6 106.8 116.2 131.8 46.1 45.2 46.2 49.6 68.8 51.6 51.8 56.0 61.3 66.4
78.0 69.2 48.5 42.9 35.3 53.4 56.1 55.8 55.2 90.4 91.3 90.7 86.4 83.1 81.3
768.8 793.0 649.6 554.9 460.4 62.9 71.9 74.3 84.3 27.0 151.3 158.3 165.8 179.9 195.3
985.1 1,146.6 1,340.5 1,294.6 1,303.4 117.8 128.1 133.2 152.6 29.9 165.7 174.4 191.9 216.3 240.3
Banking system Islam ic banks M erchant banks
A s at calendar year end-
2005 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 2001 2002 2003 2004
P58
Table A.43
Banking System: Key Data
A s at end-
2005 2001 2002 2003 2004
N um ber of institutions 49 47 46 41 42
- Commercial banks 25 24 23 23 23
- Finance companies 12 11 11 6 3
1
- Merchant banks 10 10 10 10 10
- Islamic banks 2 2 2 2 6
Risk-w eighted capital ratio (% ) 13.0 13.2 13.8 14.4 13.1
- Commercial banks
2
12.6 13.0 13.6 14.1 12.9
- Merchant banks 19.6 19.0 19.2 22.9 17.5
- Islamic banks 14.4 12.6 11.7 12.3 14.2
O ffice netw ork 2,675 2,531 2,563 2,429 2,857
- Commercial banks
2
2,534 2,386 2,414 2,276 2,072
- Merchant banks 19 17 17 17 19
- Islamic banks 122 128 132 136 766
A TM netw ork 4,169 4,213 4,396 4,708 4,892
- Commercial banks
2
3,991 4,028 4,184 4,428 4,584
- Islamic banks 178 185 212 280 308
N um ber of banks w ith internet services 8 12 12 13 13
- Commercial banks 8 12 12 13 13
Persons served per office 8,724 9,757 9,839 10,605 9,295
N um ber of em ployees 93,329 90,864 90,844 93,948 96,106
- Commercial banks
2
87,886 85,296 85,092 87,222 89,047
- Merchant banks 2,402 2,451 2,429 2,690 2,625
- Islamic banks 3,041 3,117 3,323 4,036 4,434
1
Includes RH B D elta Finance Berhad, Southern Finance Berhad and Bum iputra-C om m erce Finance Berhad w hose m erger w ith
com m ercial bank w ere com pleted on 1 January 2006
2
Includes finance com panies
Annex
P59
Table A.44
Housing Credit Institutions
Lending
rate for new
housing loans (% )
2004 2005 2004 2005
C om m ercial banks
Finance com panies
Treasury H ousing 1970 To provide housing loans to
G overnm ent em ployees Loans D ivision
M alaysia Building 1950 To be the nations single largest
provider of property finance and
to contribute to the continuous
grow th of the nation
Society Berhad
Borneo Housing M ortgage 1958 To provide housing loans m ainly
to Sabah and Saraw ak State
G overnm ent em ployees
Finance Berhad
Sabah Credit Corporation 1955 To im prove the social econom ic
developm ent of Sabah through
loans m ainly to the property,
agriculture and business sectors
Bank Kerjasam a Rakyat 1954 A co-operative society w hich
collects deposits and provides
banking facilities according to
Syariah principles
7.3
1
M alaysia Berhad
Bank Sim panan N asional 1974 To prom ote and m obilise savings
particularly from sm all savers
and to inculcate the habit of
thrift and savings
3.1
1
3.1
1
4.0
2.0 ~ 10.0
3.0 ~ 8.75
3.0 ~ 10.5

4.8
1
7.2
1
3.2
1
4.0
1
4.0
2.0 ~ 10.0
3.0 ~ 8.75
3.0 ~ 10.0
5.5
1
1,960
316
22

2
11
103
393
1,963
109
22

2
10
106
390
1
A verage
Source: Bank N egara M alaysia and various housing credit institutions
Year of
establishm ent
O bjective
N o. of
branches

P60
55.4
3.7
23.6
1.2
-52.1
83.8
-6.1
12.7
Table A.45
Outstanding Housing Loans
2004 2005p 2005p 2004 2004 2005p
RM m illion A nnual change (% ) % share
C om m ercial banks
Treasury H ousing Loans D ivision
Finance com panies
Bank Kerjasam a Rakyat M alaysia Berhad
Bank Sim panan N asional
M alaysia Building Society Berhad 1,874 1
Borneo H ousing M ortgage Finance Berhad
Sabah C redit C orporation
Total
125,824
25,051
7,009
2,519
1,059
705
239
164,280
2,776
148,329
25,395
795
3,592
1,372
713
220
183,192
48.2
17.9
1.4
-88.7
42.6
29.6
1.0
-8.3
11.5
2
81
14

2
1

100
0.0
p Prelim inary
N egligible
Source: Bank N egara M alaysia and various housing credit institutions
77
15
4
100
2
1
...
...
Table A.46
Approved Housing Loans
2005p 2005p 2005p 2004
RM m illion A nnual change (% ) % share
C om m ercial banks
Treasury H ousing Loans D ivision
Finance com panies
Bank Kerjasam a Rakyat M alaysia Berhad
M alaysia Building Society Berhad
Borneo H ousing M ortgage Finance Berhad
Bank Sim panan N asional
Sabah C redit C orporation
Total
34,140
4,086
1,553
1,040
89
249
6
42,520
22.2
-13.8
-25.7
75.9
2.4
111.1
-69.3
18.3
p Prelim inary
N egligible
Source: Bank N egara M alaysia and various housing credit institutions
80
10
1

100

4
2
1,357
36,482
4,188
97
1,111
62
848
8
44,197
1,401
6.9
2.5
-93.8
6.8
-30.1
240.8
35.5
3.9
3.2
83
9

100
3 292.7 3
2004 2004
Annex
P61
Table A.47
Islamic Banking System: Key Data
A s at end-
2001 2002 2003 2004
p Prelim inary
2005p
Number of financial institutions 38 37 33 29 29
Islam ic banks 2 2 2 2 6
C om m ercial banks 14 14 13 13 11
Finance com panies 10 9 7 3 1
M erchant banks 5 5 4 4 4
D iscount houses 7 7 7 7 7
Number of branches 132 138 143 153 782
Islam ic banks 122 128 132 136 766
C om m ercial banks 8 8 10 16 15
Finance com panies 2 2 1 1 1
Total assets (RM million) 60,244.5 68,967.9 83,105.2 95,033.9 111,823.5
Islam ic banks 17,404.8 20,119.1 20,917.3 24,857.4 43,432.9
C om m ercial banks 27,026.1 29,074.3 36,837.5 53,912.6 59,697.9
Finance com panies 9,821.6 12,501.9 17,879.2 7,767.5 1,254.1
M erchant banks 1,352.9 1,429.6 1,715.8 2,552.4 1,465.6
D iscount houses 4,639.1 5,843.0 5,755.4 5,944.0 5,973.0
Total deposits (RM million) 47,106.5 53,162.8 60,211.6 72,856.9 83,874.8
Islam ic banks 14,375.6 16,401.4 17,583.8 20,753.7 35,625.5
C om m ercial banks 22,031.0 23,353.9 26,518.7 39,775.4 42,775.2
Finance com panies 7,663.7 9,092.6 10,965.6 5,951.6 684.1
M erchant banks 673.4 684.3 851.7 1,526.8 796.6
D iscount houses 2,362.8 3,630.6 4,291.8 4,849.4 3,993.4
Total financing (RM million) 28,317.6 36,719.8 48,613.9 57,841.3 67,364.6
Islam ic banks 7,671.0 9,159.9 9,764.5 11,423.1 20,627.1
C om m ercial banks 12,257.6 16,706.4 22,326.1 38,802.2 45,398.5
Finance com panies 7,617.4 10,050.0 15,742.5 6,823.3 1,070.9
M erchant banks 771.6


803.5 780.8 792.7 268.1
D iscount houses
Financing-deposits ratio (%) 60.1 69.1 80.7 79.4 80.3
Islam ic banks 53.4 55.8 55.5 55.0 57.9
C om m ercial banks 55.6 71.5 84.2 97.6 106.1
Finance com panies 99.4 110.5 143.6 114.6 156.5
M erchant banks 114.6 117.4 91.7 51.9 33.7
D iscount houses
P62
Table A.48
Islamic Banking System: Sources and Uses of Funds
1
D enotes the interbranch balances pending settlem ent
p Prelim inary
A s at end-
2004 2005p
Islam ic
Banks
Total
RM m illion
IBS Banks
Islam ic
Banks
Total IBS Banks
Sources
C apital and reserves
D eposits
Funds from other financial institutions
O ther liabilities
Total
Uses
C ash
Reserves w ith Bank N egara M alaysia
D eposits w ith other financial institutions
Financing
Securities
O ther assets
Total
7,436.5
72,826.9
4,029.6
10,740.9
95,033.9
270.6
1,358.4
16,060.1
57,841.4
16,200.2
3,303.2
95,033.9
5,671.5
52,073.2
3,590.7
8,841.1
70,176.5
11.0
816.4
9,920.9
46,418.3
10,979.2
2,030.7
70,176.5
1,765.0
20,753.7
438.9
1,899.8
24,857.4
259.6
542.0
6,139.2
11,423.1
5,221.0
1,272.5
24,857.4
3,559.2
35,625.5
1,578.2
2,670.0
43,432.9
322.2
972.3
11,928.4
20,627.1
8,436.7
1,146.2
43,432.9
6,492.5
48,249.3
2,880.9
10,767.9
68,390.6
7.0
953.6
8,446.5
46,737.5
12,364.2
-118.2
1
68,390.6
10,051.7
83,874.8
4,459.1
13,437.9
111,823.5
329.2
1,925.9
20,374.9
67,364.6
20,800.9
1,028.0
111,823.5
Table A.49
Islamic Banking System: Commitments and Contingencies
p Prelim inary
A s at end-
2004 2005p
Islam ic
Banks
Total
RM m illion
IBS Banks
Islam ic
Banks
IBS Banks
%
share
%
share
Total
RM m illion
A ssets sold w ith recourse
and com m itm ents w ith
draw dow n
139.8 3,747.3 3,887.1 14.8 354.5 4,716.9 5,071.4 16.4
C redit extension
com m itm ents
1,572.7 9,194.2 10,766.9 40.9 4,298.4 8,829.8 13,128.2 42.4
D irect credit substitutes
429.4 507.0 936.4 3.5 481.6 568.7 1,050.3 3.4
Foreign exchange related
contracts
374.0 374.0 1.4 1,373.1 65.5 1,438.6 4.6
Trade-related contingencies
1,442.5 5,860.7 7,303.2 27.8 1,540.0 4,548.9 6,088.9 19.6
Transaction-related
contingencies
1,421.9 864.2 2,286.1 8.7 1,906.3 990.7 2,897.0 9.3
U nderw riting obligations
56.0 467.4 523.4 2.0 143.0 745.0 888.0 2.9
O thers
43.8 187.3 231.1 0.9 65.9 359.1 425.0 1.4
Total 5,480.1 20,828.1 26,308.2 100.0 10,162.8 20,824.6 30,987.4 100.0
Annex
P63
T
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P64
Table A.51
Islamic Banking System: Financing Activities
p Prelim inary
For the year
2005p 2004
Islam ic
Banks
IBS
Banks
Total
Islam ic
Banks
IBS
Banks
Total
RM m illion
2005p 2004
Islam ic
Banks
IBS
Banks
Total
Islam ic
Banks
IBS
Banks
Total
RM m illion
A s at end-
Financing approvals
3,304.5 13,968.5 17,273.0 7,915.9 18,873.3 26,789.2
Financing disbursem ents
8,771.6 32,317.0 41,088.6 13,014.0 36,044.7 49,058.7
Financing repaym ents
7,680.0 25,999.0 33,679.0 11,341.6 30,865.9 42,207.5
O utstanding financing
11,423.1 46,418.2 57,841.3 20,627.1 46,737.5 67,364.6
p Prelim inary
2005p 2004
Islam ic
Banks
IBS
Banks
Total
Islam ic
Banks
IBS
Banks
Total
RM m illion
Table A.52
Islamic Banking System: Financing to Small and Medium Enterprises
For the year
A s at end-
2005p 2004
Islam ic
Banks
IBS
Banks
Total
Islam ic
Banks
IBS
Banks
Total
RM m illion
Financing approvals

Financing disbursem ents
Total non-perform ing
financing
O utstanding financing

382.3 2,300.0 2,682.3 751.9 2,807.1 3,559.0
1,856.5 4,702.8 6,559.3 1,957.1 5,894.7 7,851.8
1,860.9 6,133.1 7,994.0 2,512.4 6,095.3 8,607.7
375.9 307.0 682.9 535.5 576.5 1,112.0
Annex
P65
Table A.53
Islamic Banking System: Direction of Financing
A s at end-
2005p 2004
Islam ic
Banks
IBS
Banks
Total
RM m illion
Total
p Prelim inary
%
share
Islam ic
Banks
IBS
Banks
Total
RM m illion
%
share
Total
Business enterprises
5,469.8 18,305.7 23,775.5 41.1 8,256.4 25,591.1 38.0
Households
5,803.4 27,392.0 33,195.4 57.4 12,193.2 60.9
Others
149.8 720.6 870.4 1.5 177.5 538.6 716.1 1.1
11,423.0 46,418.3 57,841.3 100.0 20,627.1 46,737.5 67,364.6 100.0
A griculture, hunting,
forestry and fishing
241.6 2,086.9 2,328.5 4.0 531.4 1,837.9 2,369.3 3.5
M anufacturing
1,687.7 4,424.9 6,112.6 10.6 2,368.5 5,151.0 7,519.5 11.2
M ining and quarrying
15.1 61.5 76.6
0.1 16.4 88.5 104.9 0.2
Electricity, gas and
w ater supply 11.7 707.5 719.2 1.2 275.8 143.3 419.1 0.6
W holesale and retail trade,
restaurants and hotels
447.2 2,623.7 3,070.9 5.3 820.5 2,567.5 3,388.0 5.0
Wholesale trade
292.3 1,951.0 2,243.3 3.9 559.3 1,832.9 2,392.2 3.6
Retail trade
135.3 602.6 737.9 1.3 231.3 673.7 905.0 1.3
Restaurants and hotels
19.6 70.1 89.7 0.2 29.9 60.9 90.8 0.1
Broad property sector
5,985.2 16,425.5 22,410.7 38.7 8,523.5 22,923.1 34.0
Real estate
86.3 820.1 906.4 1.6 294.6 678.1 972.7 1.4
Construction
1,452.2 2,078.7 3,530.9 6.1 1,440.3 1,891.3 3,331.6 4.9
Purchase of residential
property
3,596.4
11,796.6 15,393.0 26.6 5,796.7 10,178.0 15,974.7 23.8
Purchase of non-
residential property
850.3 1,730.1 2,580.4 4.5 991.9 1,652.2 2,644.1 3.9
Transport, storage and
com m unication
181.3 995.2 1,176.5 2.0 254.5 1,033.0 1,287.5 1.9
Finance, insurance and
business services
146.1 1,830.9 1,977.0 3.4 461.9 1,537.1 1,999.0 3.0
Financial services
94.3 1,103.3
1,197.6 2.1 141.2 1,235.1 1,376.3 2.1
Insurance
0.6 2.6 3.2 0.0 0.2 1.2 1.4 0.0
Business services
51.2 725.0 776.2 1.3 320.5 300.8 621.3 0.9
C onsum ption credit
2,134.5 14,986.5 17,121.0 29.6 6,232.2 24,376.1 36.2
Personal uses
810.6 1,637.8 2,448.4 4.2 1,236.1 2,502.1 3,738.2 5.5
Credit cards
127.1 184.9 312.0 0.5 166.1 301.0 467.1 0.7
Purchase of consumer
durables
33.0 10.6 43.6 0.1 31.3 6.7 38.0 0.1
Purchase of passenger cars
1,163.8 13,153.2 14,317.0 24.8 4,798.7 15,334.1 20,132.8 29.9
Purchase of securities
256.1 621.8 877.9 1.5 571.6 348.7 920.3 1.4
Purchase of transport vehicles
72.5 609.0 681.5 1.2 164.2 542.4 706.6 1.0
C om m unity, social and
personal services
94.2 324.3 418.5 0.7 229.0 406.2 635.2 0.9
O thers 149.8 720.6 870.4 1.5 177.6 538.4 716.0 1.1
11,423.0 46,418.3 57,841.3 100.0 20,627.1 46,737.5 67,364.6 100.0
P66
A s at end-
2005p 2004
Islam ic
Banks
IBS
Banks
Total
RM m illion
Total
p Prelim inary
%
share
Islam ic
Banks
IBS
Banks
Total
RM m illion
%
share
Total
Business enterprises
Households
Others
O thers
Table A.54
Islamic Banking System: Non-performing Financing by Sector
1,090.1 1,346.7 2,436.8 49.0 1,383.1 1,262.8 2,645.9 44.2
572.4 1,864.4 2,436.8 49.0 1,005.2 2,137.0 3,142.2 52.4
6.2 88.4 94.6 2.0 11.3 192.5 203.8 3.4
1,668.7 3,299.5 4,968.2 100.0 2,399.6 3,592.3 5,991.9 100.0
A griculture, hunting,
forestry and fishing
38.4 7.4 45.8 0.9 58.1 8.7 66.8 1.1
M anufacturing
195.4 69.7 265.1 5.3 287.3 155.8 443.1 7.4
M ining and quarrying
5.1 1.1 6.2 0.1 5.6 4.3 9.9 0.2
Electricity, gas and
w ater supply
2.1 0.1 2.2 0.0 2.8 0.3 3.1 0.1
W holesale and retail trade,
restaurants and hotels
92.9 138.8 231.7 4.7 104.0 103.5 207.5 3.5
Wholesale trade
54.7 52.7 107.4 2.2 67.1 27.5 94.6 1.6
Retail trade
29.1 80.6 109.7 2.2 29.8 69.4 99.2 1.7
Restaurants and hotels
9.1 5.5 14.6 0.3 7.1 6.6 13.7 0.2
Broad property sector
992.0 2,320.2 3,312.2 66.7 1,446.4 2,183.7 3,630.1 60.6
Real estate
0.9 302.2 303.1 6.1 5.5 180.8 186.3 3.1
Construction
407.2 364.2 771.4 15.5 439.9 352.9 792.8
13.2
Purchase of residential
property
373.9 1,416.0 1,789.9 36.0 726.5 1,447.3 2,173.8 36.3
Purchase of non-
residential property
210.0 237.8 447.8 9.0 274.5 202.7 477.2 8.0
Transport, storage and
com m unication
36.4 92.9 129.3 2.6 81.0 72.4 153.4 2.6
Finance, insurance and
business services
14.7 7.6 22.3 0.4 32.7 36.0 68.7 1.1
Financial services
10.8 1.1 11.9 0.2 12.0 31.0 43.0 0.7
Insurance
0.5 0.2 0.7 0.0 0.2 0.2
0.0
Business services
3.4 6.3 9.7 0.2 20.5 5.0 25.5
0.4
C onsum ption credit
134.1 86.0 220.1 4.4 166.6 116.9 283.5
4.7
Personal uses
124.8 75.2 200.0 4.0 155.3 85.5 240.8
4.0
Credit cards
6.9 10.4 17.3 0.3 8.0 31.2 39.2
0.6
Purchase of consumer
durables
2.4 0.4 2.8 0.1 3.3 0.2 3.5 0.1
Purchase of securities
65.4 93.9 159.3 3.2 65.7 124.5 190.2 3.2
Purchase of transport vehicles
1
64.4 362.5 426.9 8.6 112.3 572.7 685.0 11.4
C om m unity, social and
personal services
21.6 30.9 52.5 1.1 26.0 21.0 47.0 0.8
6.2 88.4 94.6 1.9 11.1 192.5 203.6 3.3
1,668.7 3,299.5 4,968.2 100.0 2,399.6 3,592.3 5,991.9 100.0
1
Annex
P67
A s at end- A s percentage of total deposits (% )
C om m ercial banks
RM m illion %
p Prelim inary
Table A.55
Islamic Banking System: Deposits by Type and Institution
2001 2002 2003 2004 2005p 2001 2002 2003 2004 2005p
Total deposits
47,106.5 53,162.8 60,211.6 72,856.9 83,874.8 100.0 100.0 100.0 100.0 100.0
Islam ic banks
14,375.6 16,401.4 17,583.8 20,753.7 35,625.5 30.9 29.2 28.5 42.5
22,031.0 23,353.9 26,518.7 39,775.4 42,775.2 46.8 43.9 44.0 54.6 51.0
Finance com panies
7,663.7 9,092.6 10,965.6 5,951.6 684.1 16.3 17.1 18.2 8.2 0.8
M erchant banks
673.5 684.2 851.7 1,526.8 796.6 1.4 1.3 1.4 2.1 0.9
D iscount H ouses
2,362.7 3,630.7 4,291.8 4,849.4 3,993.4 5.0 6.8 7.2 6.6 4.8
Demand deposits
6,457.4 9,191.7 10,979.7 12,916.8 14,785.6 13.7 17.3 18.2 17.7 17.6
Islam ic banks
2,616.2 3,457.2 4,142.9 4,577.9 6,954.7 5.6 6.5 6.9 6.3 8.3
C om m ercial banks
3,841.2 5,734.5 6,836.8 8,338.7 7,830.9 8.1 10.8 11.3 11.4 9.3
Savings deposits
4,149.4 5,425.0 6,865.7 8,432.1 9,504.5 8.8 10.2 11.4 11.6 11.3
Islam ic banks
1,454.0 1,762.3 1,951.9 2,301.6 3,424.8 3.1 3.3 3.2 3.2 4.1
C om m ercial banks
2,133.4 3,030.5 4,174.8 5,771.3 6,047.1 4.5 5.7 6.9 7.9 7.2
Finance com panies
562.0 632.2 739.0 359.1 32.6 1.2 1.2 1.3 0.5 0.0
Investment deposits
33,504.0 35,843.4 35,227.5 41,993.5 44,579.3 71.1 67.4 58.5 57.6 53.2
Islam ic banks
10,181.1 11,089.6 11,183.0 12,916.9 19,972.6 21.6 20.9 18.5 17.7 23.8
C om m ercial banks
13,609.6 12,455.5 10,226.5 19,150.2 19,328.9 28.9 23.4 17.0 26.3 23.1
Finance com panies
6,985.8 8,403.4 9,019.4 3,859.6 651.6 14.8 15.8 15.0 5.3 0.8
M erchant banks
369.8 377.0 590.3 1,304.0 744.9 0.8 0.7 1.0 1.8 0.9
D iscount houses
2,357.7 3,517.9 4,208.3 4,762.8 3,881.3 5.0 6.6 7.0 6.5 4.6
Other deposits
2,995.7 2,702.7 7,138.7 9,514.6 15,005.4 6.4 5.1 11.9 13.1 17.9
Islam ic banks
124.3 92.4 306.0 957.2 5,273.3 0.3 0.2 0.5 1.3 6.3
C om m ercial banks
2,446.9 2,133.4 5,280.6 6,515.1 9,568.3 5.2 4.0 8.8 8.9 11.4
Finance com panies
115.8 56.9 1,207.1 1,732.8 0.0 0.2 0.1 2.1 2.4 0.0
M erchant banks
303.7 307.3 261.4 222.8 51.6 0.7 0.6 0.4 0.4 0.1
D iscount houses
5.0 112.7 83.6 86.7 112.2 0.0 0.2 0.1 0.1 0.1
P68
Table A.56
Development Financial Institutions
1
: Sources and Uses of Funds
A s at end-
2005 2001 2002 2003 2004
RM m illion
Sources:
Shareholdersfunds
Paid-up capital
Reserves
Retained earnings
D eposits accepted
Borrow ings
Government
Multilateral/International
agencies
Others
O thers
Total
Uses:
D eposits placed
Investm ents
of which:
Government securities
Shares
Quoted
Unquoted
Loans and advances
Fixed assets
O thers
Total
Contingencies:
G uarantee
Export credit insurance
Total
1
Refers to Bank Pem bangunan M alaysia Berhad, Bank Kerjasam a Rakyat M alaysia Berhad, Bank Sim panan N asional, Export-Im port Bank
of M alaysia Berhad, Bank Pertanian M alaysia, Bank Perusahaan Kecil & Sederhana M alaysia Berhad (SM E Bank), M alaysian Industrial
D evelopm ent Finance Berhad, Sabah D evelopm ent Bank Berhad, Borneo D evelopm ent C orporation (Sabah) Sendirian Berhad, Borneo
D evelopm ent C orporation (Saraw ak) Sendirian Berhad, C redit G uarantee C orporation M alaysia Berhad, Sabah C redit C orporation and
Lem baga Tabung H aji. Prior to 1 O ctober 2005, data include Bank Industri & Teknologi M alaysia Berhad and M alaysia Export C redit
Insurance Berhad and exclude SM E Bank
6,906.7 7,905.4 9,424.1 10,543.8 12,616.4
5,416.9 6,012.4 7,192.3 7,862.3 8,563.4
1,196.2 1,517.0 1,599.6 2,051.3 2,448.1
293.6 376.0 632.2 630.2 1,604.9
39,305.7 39,797.6 42,403.3 49,878.0 53,536.6
13,024.9 13,977.0 16,576.8 18,730.9 20,981.6
6,625.8 8,875.4 11,730.2 13,050.1 14,871.4
3,321.7 3,434.3 3,158.5 4,044.2 4,646.7
3,077.4 1,667.3 1,688.1 1,636.6 1,463.5
8,828.5 10,766.4 10,686.2 12,297.2 13,009.8
68,065.8 72,446.4 79,090.4 91,449.9 100,144.4
12,265.2 12,446.2 16,244.7 18,908.0 14,111.1
21,968.0 19,268.1 21,229.5 25,557.0 29,731.3
3,715.0 1,952.3 2,950.8 2,629.3 4,777.8
5,099.4 6,427.4 6,778.1 8,256.0 9,791.2
4,478.5 5,325.6 5,200.9 6,369.1 7,933.7
620.9 1,101.8 1,577.2 1,886.9 1,857.5
24,486.3 29,442.4 32,354.8 37,747.1 47,478.4
3,011.6 3,606.7 3,707.5 4,057.7 4,226.9
6,334.7 7,683.0 5,553.9 5,180.1 4,596.7
68,065.8 72,446.4 79,090.4 91,449.9 100,144.4
3,341.5 3,160.1 3,661.6 3,949.0 4,404.1
148.0 151.4 123.3 308.6 380.4
3,489.5 3,311.5 3,784.9 4,257.6 4,784.5
Annex
P69
Table A.57
Development Financial Institutions
1
under DFIA
2
: Sources and Uses of Funds
A s at end-
2005 2001 2002 2003 2004
RM m illion
Sources:
Shareholdersfunds
Paid-up capital
Reserves
Retained earnings
D eposits accepted
Borrow ings
Government
Multilateral/International
agencies
Others
O thers
Total
Uses:
D eposits placed
Investm ents
of which:
Government securities
Shares
Quoted
Unquoted
Loans and advances
Fixed assets
O thers
Total
Contingencies:
G uarantee
Export credit insurance
Total
1
Refers to Bank Pem bangunan M alaysia Berhad, Bank Kerjasam a Rakyat M alaysia Berhad, Bank Sim panan N asional, Export-Im port Bank
of M alaysia Berhad, Bank Pertanian M alaysia and Bank Perusahaan Kecil & Sederhana M alaysia Berhad (SM E Bank). Prior to 1 O ctober
2005, data include Bank Industri & Teknologi M alaysia Berhad and M alaysia Export C redit Insurance Berhad and exclude SM E Bank
2
D evelopm ent Financial Institutions A ct 2002
3,495.0 4,087.6 5,359.4 6,178.1 7,719.3
2,718.0 3,288.5 4,167.5 4,811.1 5,503.6
389.1 877.7 964.1 1,339.4 1,736.3
387.9 -78.6 227.8 27.6 479.4
28,663.3 29,373.9 30,762.7 37,278.5 40,225.5
9,668.2 9,851.7 12,347.7 14,586.9 16,660.8
4,659.0 6,248.0 9,039.8 10,438.2 12,146.2
3,037.8 3,135.1 2,933.9 3,846.3 4,205.9
1,971.4 468.6 374.0 302.4 308.7
6,088.6 8,358.2 8,403.7 9,730.3 10,217.7
47,915.1 51,671.4 56,873.5 67,773.8 74,823.3
8,771.4 8,212.5 11,383.5 12,949.5 8,185.6
12,579.6 11,637.0 12,970.7 15,868.1 18,666.7
3,355.0 1,952.3 2,736.5 2,549.8 4,730.0
2,364.4 6,427.4 1,778.5 1,705.8 1,803.3
2,205.4 5,325.6 1,664.7 1,616.7 1,686.7
159.0 1,101.8 113.8 89.1 116.6
21,135.9 25,191.1 28,072.3 33,472.5 43,381.0
947.2 1,496.0 1,550.3 1,786.1 1,842.0
4,481.0 5,134.8 2,896.7 3,697.6 2,748.0
47,915.1 51,671.4 56,873.5 67,773.8 74,823.3
672.5 575.4 549.1 533.3 613.5
148.0 151.5 123.3 308.6 380.4
820.5 726.9 672.4 841.9 993.9
P70
474.4
37,747.1
984.2
2,156.7
1,228.9
4,126.2
66.8
3,261.3
698.8
10,084.7
4,186.6
4,078.1
463.9
1,356.1
4,665.2
9,896.5
1,104.8
24.3
103.4
473.1
32,354.8
1,694.7
1,405.3
617.1
3,952.0
75.2
2,874.0
250.4
8,376.6
4,009.4
2,927.9
441.1
998.2
4,433.7
8,066.5
800.2
23.7
136.2
530.4
29,442.4
1,780.5
934.4
453.8
3,356.6
90.0
2,964.3
240.4
7,840.6
3,790.6
2,785.2
393.4
871.4
4,362.1
6,716.1
816.5
48.0
173.2
733.1
24,486.3
1,300.7
1,234.4
334.9
3,147.5
46.1
2,750.2
618.1
5,700.4
2,346.9
2,593.8
268.8
490.9
2,860.5
5,404.2
819.2
47.8
356.2
M aritim e
Table A.58
Development Financial Institutions
1
: Direction of Lending
A s at end-
2005 2001 2002 2003 2004
RM m illion
Im port and export, w holesale and retail
of which:
Total
1
Refers to Bank Pem bangunan M alaysia Berhad, Bank Kerjasam a Rakyat M alaysia Berhad, Bank Sim panan N asional, Export-Im port Bank
of M alaysia Berhad, Bank Pertanian M alaysia, Bank Perusahaan Kecil & Sederhana M alaysia Berhad (SM E Bank), M alaysian Industrial
D evelopm ent Finance Berhad, Sabah D evelopm ent Bank Berhad, Borneo D evelopm ent C orporation (Sabah) Sendirian Berhad, Borneo
D evelopm ent C orporation (Saraw ak) Sendirian Berhad, C redit G uarantee C orporation M alaysia Berhad, Sabah C redit C orporation and
Lem baga Tabung H aji. Prior to 1 O ctober 2005, data include Bank Industri & Teknologi M alaysia Berhad and exclude SM E Bank
Finance, insurance and business services
O thers
Electricity, gas and w ater supply
M anufacturing
M ining and quarrying
A griculture, forestry and fishery
trade, restaurants and hotels
Broad property sector
Construction
Purchase of residential property
Purchase of non-residential property
Real estate
Transport, storage and com m unication
C onsum ption credit
Purchase of motor vehicles
Credit card
Purchase of securities
47,478.4
810.7
682.5
3,551.5
2,253.0
4,458.6
56.6
3,357.6
643.3
11,662.9
5,120.5
5,475.1
429.6
637.7
5,844.5
14,069.0
1,508.2
32.6
88.2
Annex
P71
Table A.59
Development Financial Institutions
1
under DFIA
2
: Direction of Lending
A s at end-
2005 2001 2002 2003 2004
RM m illion
Total
A griculture, forestry and fishery
M ining and quarrying
M anufacturing
Electricity, gas and w ater supply
Im port and export, w holesale and retail
trade, restaurants and hotels
Broad property sector
Construction
Purchase of residential property
Purchase of non-residential property
Real estate
Transport, storage and com m unication
M aritim e
Finance, insurance and business services
C onsum ption credit
of which:
Purchase of motor vehicles
Credit card
Purchase of securities
O thers
1
Refers to Bank Pem bangunan M alaysia Berhad, Bank Kerjasam a Rakyat M alaysia Berhad, Bank Sim panan N asional, Export-Im port Bank
of M alaysia Berhad, Bank Pertanian M alaysia and Bank Perusahaan Kecil & Sederhana M alaysia Berhad (SM E Bank). Prior to 1 O ctober
2005, data include Bank Industri & Teknologi M alaysia Berhad and exclude SM E Bank
2
D evelopm ent Financial Institutions A ct 2002
2,628.3 2,823.1 2,749.1 3,148.3 3,239.5
34.5 80.5 58.8 49.1 35.5
2,204.2 2,130.2 2,675.3 2,872.2 3,254.5
334.9 453.8 617.1 1,228.9 2,251.6
129.0 125.9 151.5 260.7 356.9
5,078.2 6,846.9 7,371.4 8,933.1 10,580.9
2,192.1 3,641.3 3,842.0 3,973.7 4,908.8
2,288.0 2,480.3 2,629.3 3,797.0 5,195.4
267.3 391.3 438.8 461.2 429.1
330.8 334.0 461.3 701.2 47.6
2,746.5 4,321.6 4,390.0 4,615.0 5,794.9
733.1 530.4 473.1 474.4 682.5
1,198.0 877.6 896.0 827.4 657.0
5,339.6 6,567.8 7,812.8 9,571.1 13,693.8
754.6 741.2 800.2 1,104.8 1,508.2
47.8 48.0 23.7 24.3 32.6
356.2 173.2 136.2 103.4 88.2
353.4 260.1 741.0 1,388.9 2,745.7
21,135.9 25,191.1 28,072.3 33,472.5 43,381.0
P72
Table A.60
Bank Perusahaan Kecil & Sederhana Malaysia Berhad (SME Bank)
(formerly known as Bank Industri & Teknologi Malaysia Berhad)
Year of establishm ent
O bjectives
D uring
the year
D ec 04
1
Sept 05
1
D ec 05 2004
1
SM Es
Bumiputera
Non-Bumiputera
M aritim e
Shipping industry
Shipyard industry
Marine-related services
M anufacturing
of w hich: High-technology
O thers
Source : Bank Perusahaan Kecil & Sederhana M alaysia Berhad
Sector
Total
Loans O utstanding
A s at end-
To provide financing and advisory services to SM Es involve in m anufacturing, services and
construction sectors, particularly Bum iputera entrepreneurs.
RM m illion
O ctober 2005
D uring the period
D uring
the year
D uring the period
Loans A pproved Loans D isbursed
Jan - Sept
05
1
O ct - D ec
05
2004
1
Jan - Sept
05
1
O ct - D ec
05
1
Refers to data for Bank Industri&
2,133.0
1,694.5
438.5

474.4 534.6 378.1 171.5


309.4 355.5 217.5 144.6
112.9 116.0 9.2 10.9
52.1 63.1 151.4 16.0
407.9 452.7 329.8 147.6
38.0 132.7 70.0 1.9
84.4 88.9

37.6 39.0
966.7 1,076.2 2,133.0 745.5 358.1
319.7
271.0
333.8
311.2
22.6
333.8
15.0
118.4 55.3
48.7
24.3
214.0
80.6
32.2
111.8
234.5
319.7
122.0
17.9
241.4
7.6
0.0
448.5
0.0
Annex
P73
O bjectives
1
Table A.61
Export-Import Bank of Malaysia Berhad
Year of establishm ent
1995
Loans A pproved (RM m illion) Loans D isbursed (RM m illion)
Loans Facility
2005 2005 2004 2004
Buyer credit facility
O verseas investm ent credit facility
Supplier credit facility
Export of services financing facility
Export credit refinancing
Total
Total
Source: Export-Im port Bank of M alaysia Berhad
To provide credit facilities to finance and support the exports and im ports
of goods, services and overseas project financing w ith concentration to
the non-traditional m arkets, as w ell as to provide export credit insurance
services, export financing insurance, overseas investm ent insurance and
guarantee facilities; as w ell as other services w hich are norm ally offered
by the export-im port financial institutions and credit insurance financial
institutions.
Sub-total
2
M edium - and Long-term Policies
Specific policies
Buyer credit guarantee
Bond indemnity support
Overseas investment insurance
Others
Guarantee and Insurance Policy
Short-term Policies
Comprehensive policies
Bank letter of credit policy
Specific policies
Bond indemnity support
Others
Sub-total
A s at end-2004 A s at end-2005
C ontingent Liabilities (RM m illion) Business C overage (RM m illion)
2005 2004
1
Effective 1 O ctober 2005, the bank has been entrusted w ith a new and revised m andated role follow ing the m erger w ith M alaysia
Export C redit Insurance Berhad (M EC IB)
2
Excluding Banker's export finance insurance policy
252.7 393.3 24.3 145.3
196.4 215.8 212.6 160.6
306.8 496.7 363.8 455.8
0.0 42.3 0.0 0.0
6,762.6 7,286.1 6,762.6 7,286.1
7,518.5 8,434.2 7,363.3 8,047.8
351.3 459.4 1,540.5 1,715.3
307.0 369.5 1,479.3 1,577.2
20.4 45.7 61.2 138.1
0.8 0.0 0.0 0.0
2.5 0.0 0.0 0.0
20.6 44.2 0.0 0.0
351.3 459.4 1,540.5 1,715.3
490.6 534.5 22.1 3.8
1.0 0.0 9.6 0.0
277.8 241.7 0.0 0.0
24.7 23.0 4.1 0.0
7.5 10.9 8.4 3.8
179.6 258.9 0.0 0.0
490.6 534.5 22.1 3.8
841.9 993.9 1,562.6 1,719.1
P74
Table A.62
Bank Simpanan Nasional
Year of establishm ent 1974
O bjectives Bank Sim panan N asional is a savings bank, incorporated under the
N ational Savings Bank A ct 1974 and focuses on retail banking and
personal finance especially for sm all savers.
D eposits A ccepted
(RM m illion)
Interest Rate /
Rate of Return (% )
Deposits facility
A s at end-2004 A s at end-2005 2004 2005
Savings deposits
Fixed deposits
G IRO deposits
Islam ic deposits
Prem ium savings certificates
Total
RM m illion
Investments
Q uoted shares
M alaysian G overnm ent Securities
Private debt securities
Subsidiary com panies
A ssociate com panies
Total
N um ber of branches
N um ber of account holders (000)
N um ber of autom atic teller m achines (A TM )
Source: Bank Sim panan N asional
A s at end-2005 A s at end-2004
3,626.6
231.8
393
5,034.1
1,319.4
437.8
231.8
1,208.8 1,277.7
2,267.1
819.7
437.8
11,446
599
6,824.4
390
11,537
616
0.30~1.50
3.00~3.70
0.30~1.50
1.00~3.81
1.00~2.00
265.0
3.00~3.70
1.00~2.00
1.90~5.52
882.6
6,823.7
4,262.5
1,103.7
4,654.2
4,054.1
252.0
922.8
10,986.8 13,085.2
1.50 851.4
Annex
P75
Table A.63
Bank Kerjasama Rakyat Malaysia Berhad
Year of establishm ent 1954
O bjectives Bank Kerjasam a Rakyat M alaysia Berhad m obilises savings and
provides financing services to its m em bers as w ell as
non-m em bers.
Financing O utstanding (RM m illion)
A s at end-2004 A s at end-2005
Sector
M em bers N on-m em bers M em bers N on-m em bers
A griculture
Purchase of property
G eneral com m erce
Purchase of securities
Purchase of m otor vehicles
C onsum ption credit
M anufacturing
O thers
Total
Source: Bank Kerjasam a Rakyat M alaysia Berhad
10.2 14.9
822.7 1,333.3
399.5 497.6
78.9 69.3
0.6 0.5
1,032.1 2,859.6
100.8 100.8
251.1 295.1
2,695.9 5,171.1

45.7
10.8
649.6
6,656.8

1,122.9
2,800.6
7,623.9
9,658.0 11,659.2
58.3
7.8
48.3 45.7
2,246.8
P76
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1
,
3
6
6
.
4
1
,
3
1
7
.
0
2
4
7
.
4
7
0
.
0
1
7
7
.
4
8
.
9
5
7
7
.
2
1
,
2
2
6
.
0
2
,
9
6
0
.
0
0
.
0
0
.
0
2
3
.
0
2
3
.
0
8
.
9
3
,
9
9
0
.
9
2
,
5
5
2
.
9
1
,
4
3
8
.
0
5
9
7
.
7
6
6
9
.
7
1
8
9
.
5
4
8
0
.
2
6
8
.
4
3
6
.
7
1
9
.
4
3
9
.
0
3
9
.
0
7
7
7
.
1
0
.
0
0
.
0
2
7
9
.
3
4
,
5
8
8
.
6
S
o
u
r
c
e
:

B
a
n
k

P
e
m
b
a
n
g
u
n
a
n

M
a
l
a
y
s
i
a

B
e
r
h
a
d
Annex
P77
Table A.65
Bank Pertanian Malaysia
Year of establishm ent 1969
O bjectives
Loans A pproved Loans D isbursed
(RM m illion)
Sub-sector
2004 2005 2005 2004
Oil palm
Total
Source: Bank Pertanian M alaysia
Food crops
Agriculture, Forestry & Fishery
Livestock
Fishery
Forestry
Tobacco
Rubber
Others
Bank Pertanian M alaysia w as established to prom ote sound agricultural
developm ent in the country, through the provision of loans and advances.
The m ain function of the bank is to co-ordinate and supervise the granting
of credit facilities for agricultural purposes and m obilise savings, particularly
from the agriculture sector and com m unity.
196.8
74.4
60.4
122.7
21.0
0.7
8.4
615.2
1,099.6
19.7
9.3
578.0
928.0
1.4
865.5 716.7
307.3
186.4
85.8
63.5
42.6
69.2
46.8
8.5
7.5
82.4
16.5
308.4
1.6
16.2
14.0
67.4
109.2
110.3
237.0 121.2
P78
Table A.66
Other Development Financial Institutions
1
: Core Activities
A s at end-
RM m illion
2005
Lending Activity
A griculture
M anufacturing
Broad property sector
Construction
Purchase of residential property
Purchase of non-residential property
Real estate
Total
Other Activities
D eposits accepted
of which:
Savings
G uarantee issued
1
(Sabah) Sendirian Berhad, Borneo D evelopm ent C orporation (Saraw ak) Sendirian Berhad, C redit G uarantee C orporation M alaysia
Berhad, Sabah C redit C orporation and Lem baga Tabung H aji
2004 2003 2002 2001
C onsum ption credit
O thers
122.0 141.2 124.9 113.1 118.1
943.3 1,226.4 1,276.7 1,254.0 1,204.0
622.2 993.7 1,005.2 1,151.6 1,082.0
154.8 149.2 167.4 212.9 211.7
305.7 304.9 298.6 281.1 279.6
1.5 2.1 2.3 2.7 0.5
160.2 537.5 536.9 654.9 590.2
64.6 148.4 253.6 325.4 375.3
1,598.3 1,741.7 1,621.9 1,430.5 1,318.0
3,350.4 4,251.4 4,282.3 4,274.6 4,097.4
10,642.4 10,423.7 11,640.6 12,599.5 13,311.2
10,565.8 10,270.4 11,286.6 12,085.4 12,771.2
2,669.0 2,584.7 3,112.5 3,415.7 3,790.6
Annex
P79
Table A.67
Development Financial Institutions: Selected Data
A s at end-
2004 2005
DFIs under DFIA
1
: Branch ATM Staff Branch ATM Staff
Bank Pem bangunan M alaysia Berhad
2
Bank Kerjasam a Rakyat M alaysia Berhad
Bank Sim panan N asional
Export-Im port Bank of M alaysia Berhad
3
Bank Pertanian M alaysia
Sub-total
Other DFIs:
M alaysian Industrial D evelopm ent
Finance Berhad
Sabah D evelopm ent Bank Berhad
Borneo D evelopm ent C orporation (Sabah)
Sendirian Berhad
Borneo Developm ent Corporation (Saraw ak)
Sendirian Berhad
Credit G uarantee Corporation M alaysia Berhad
Sabah C redit C orporation
Lem baga Tabung H aji
Sub-total
Total
1
D evelopm ent Financial Institutions A ct 2002
Bank Perusahaan Kecil & Sederhana
M alaysia Berhad
3
14 690 377
103 119 2,866 106 127 2,860
393 599 5,220 390 616 5,098
72 160
181 142 2,585 172 142 2,628
15 678
691 860 11,433 683 885 11,801
7 334 8 332
82 81
16 13
36 35
16
10 10 210
325 16 374
212
119 1,581 119 1,600
152 2,586 153 2,645
843 860 14,019 836 885 14,446











P80
2004 2005 2005 2005 2004 2004
1
Inclusive of funds from Bank N egara M alaysia, w hich are channelled through 25 participating banks
2
Funds have been fully utilised


N egligible
Loans (RM m illion)
A pproved D isbursed
O utstanding
as at end-
Table A.68a
6,770.8 7,286.1 6,770.8 7,286.1 1,189.7 1,508.3
9.3 9.3 5.9 11.9 20.2 30.2
0.9 10.4 1.7 8.8 7.1
9.0 14.7 6.6 7.5 17.6 20.0
1.4 4.5 1.4 1.6 2.2 3.6
30.4 45.7 30.2 33.8 25.3 26.6
6.4 5.4
1.6 1.3 1.2

0.2 2.9 0.2 0.2 0.1
5.7 3.9 12.8 21.1 17.6 63.1

40.9 33.7
1.6 1.9 1.6 1.4 15.9 15.4
4.0 1.3 2.2 1.5 0.3 1.8
0.4 15.7 10.5
4.5 8.9 1.1 1.7 1.1 2.8
2.3 2.8 0.3 1.9 0.3 2.1
26.1 87.3 42.2 29.7 88.0 96.9
0.8 0.4 0.7 0.5 1.4 1.6
Development Financial Institutions: Government Special Funds
Export-Import Bank of Malaysia Berhad
Export C redit Refinancing (EC R) Schem e
1
Bank Kerjasama Rakyat Malaysia Berhad
Financing Schem e for Rural Econom ic D evelopm ent
Bank Pertanian Malaysia
A gricultural M echanisation and A utom ation Schem e
Bum iputera C om m ercial and Industrial C om m unity Schem e
C om m ercial A griculture G raduate Entrepreneurs Schem e
C redit Schem e for Paddy
Financial C redit Schem e
2
Food Production C redit Schem e
H ardcore Poor D evelopm ent Program m e
2
Low Intensity Tapping Schem e
O il Palm Replanting Schem e
Special A griculture Financing Schem e
2
Special Fund for Fishery
Malaysian Industrial Development Finance Berhad
M alaysian Industrial Energy Efficiency Im provem ent Project
M odernisation A utom ation Schem e
2
Soft Loan for Factory Relocation Schem e
Soft Loan for Inform ation and C om m unication Technology Schem e
Soft Loan for Sm all and M edium Enterprises Schem e
Special Fund for Terengganu-based Sm all and M edium Industry
Annex
P81
2004 2005 2005 2005 2004 2004
Loans (RM m illion)
A pproved D isbursed
O utstanding
as at end-
Table A.68b
15.8 5.9 6.0
8.8 0.3 5.0 6.2 4.4 7.5
0.3 0.3
8.8 10.9 5.2 9.1 29.0 34.2
2.6 2.4
5.9 5.5 5.0 5.1 11.7 13.0
52.5 1.5 27.6 22.3 66.8 79.1
211.0 177.3 100.5 96.8 132.4 226.0
4.4 2.1 14.9 3.2 15.0 12.9
5.0 15.2 4.2 8.4 6.8
205.0 52.0 66.8 30.7 83.7 79.4
0.2 8.2 8.8
12.1 0.1 13.2 6.7 6.0
1.4 0.8 0.8
0.2 0.2 0.2
41.4 78.9 15.6 68.1 38.0 48.4
35.0 222.0 29.2 213.2 71.7 197.0
11.3 1.1 11.4 7.3 5.9
10.0 56.5
3.7 29.6 223.2

20.0 4.2 91.7


0.6 6.7
0.3
4.0 2.2 35.2
2.3
1.7 1.8 14.3
3.0 75.1
32.6 33.2 257.1
0.8 1.5 12.7
6.4
6.7
1.0

1.5 5.1 11.1


0.4 1.1
0.2 0.4

0.7
0.4

4.9
Development Financial Institutions: Government Special Funds
Funds prior to rationalisation (data until end-September 2005)
Bank Pembangunan dan Infrastruktur Malaysia Berhad
Fiction Film Financing Schem e
Financing Program m e for W holesalers and D istributors (Tanm iah 2)
Financing Schem e for Indian Rural Econom ic D evelopm ent
Financing Schem e for Rural Econom ic D evelopm ent
Fund for Film Industry
G raduate Entrepreneurs Fund
Seed C apital Schem e
Special Fund for Tourism 2
Terengganu Entrepreneurs Fund
Third W indow Financing Schem e (Tanm iah 1)
Tourism Infrastructure Fund
Venture C apital Fund
Batik Entrepreneurs Program m e
H andicraft Entrepreneurs Program m e
Bank Industri & Teknologi Malaysia Berhad
Easy Financing Schem e - PA KSI
H igh Technology Fund
N ew Ship Financing Facility
W om en Entrepreneurs Fund
Funds after rationalisation (data for October-December 2005)
Bank Pembangunan Malaysia Berhad
H igh Technology Fund**
N ew Ship Financing Facility**
Tourism Infrastructure Fund*
Bank Perusahaan Kecil & Sederhana Malaysia Berhad
Financing Program m e for W holesalers and D istributors (Tanm iah 2)*
Financing Schem e for Indian Rural Econom ic D evelopm ent*
Financing Schem e for Rural Econom ic D evelopm ent*
Fund for Film Industry*
G raduate Entrepreneurs Fund*
Seed C apital Schem e*
Special Fund for Tourism 2*
Terengganu Entrepreneurs Fund*
Third W indow Financing Schem e (Tanm iah 1)*
Venture C apital Fund*
Fiction Film Financing Schem e*
Batik Entrepreneurs Program m e*
H andicraft Entrepreneurs Program m e*
Easy Financing Schem e - PA KSI**
W om en Entrepreneurs Fund**
*
Funds originated from Bank Pem bangunan dan Infrastruktur M alaysia Berhad
**
Funds originated from Bank Industri & Teknologi M alaysia Berhad


N egligible
P82
Loans (RM m illion)
A pproved D isbursed
O utstanding
as at end-
2004 2005 2005 2005 2004 2004
1
2
Funds have been fully utilised
4
A dm inisters and channels the funds through various lending institutions
Malaysian Industrial Development Finance Berhad
N ew Entrepreneurs Fund
2
N ew Entrepreneurs Fund 2
Fund for Sm all and M edium Industries
2
Fund for Sm all and M edium Industries 2
Rehabilitation Fund for Sm all and M edium Industries
3
Industrial A djustm ent Fund
2
Bum iputera Industrial Fund
2
Bank Pertanian Malaysia
Fund for Food
Fund for Sm all and M edium Industries
2
Fund for Sm all and M edium Industries 2
Rehabilitation Fund for Sm all and M edium Industries
3
Credit Guarantee Corporation Malaysia Berhad
4
N ew Entrepreneurs Fund 2
Fund for Sm all and M edium Industries
2
Table A.69a
Development Financial Institutions: Bank Negara Malaysia Funds
1
5.6 4.3
18.5 28.2 11.4 21.5 35.1 53.7
19.5
79.7 81.1 38.9 74.8 46.9 102.7
1.4 0.9
3.7
1.4
117.6 96.0 119.2 116.6 595.8 628.7
81.3
1.3 1.2 0.8 4.3 4.9
12.3 10.9
305.0 262.7
1.2 276.7 63.8
Annex
P83
Loans (RM m illion)
A pproved D isbursed
O utstanding
as at end-
2004 2005 2005 2005 2004 2004
1
Bank N egara M alaysia fund for the EC R schem e adm inistered by EXIM Bank is m erged w ith the G overnm ent fund in Table A .68a
2
Funds have been fully utilised
3
Fund w as closed on 1 N ovem ber 2003 and replaced by the Rehabilitation Fund for Sm all Businesses
Funds prior to rationalisation (data until end-September 2005)
Bank Pembangunan dan Infrastruktur Malaysia Berhad
Special Fund for Tourism
2
N ew Entrepreneurs Fund
2
N ew Entrepreneurs Fund 2
Bum iputera Industrial Fund
2
Fund for Food
Fund for Sm all and M edium Industries
2
Fund for Sm all and M edium Industries 2
Rehabilitation Fund for Sm all and M edium Industries
3
Bank Industri & Teknologi Malaysia Berhad
Ship Financing Facility
2
Fund for Sm all and M edium Industries
2
Fund for Sm all and M edium Industries 2
N ew Entrepreneurs Fund 2
Industrial A djustm ent Fund
2
Rehabilitation Fund for Sm all and M edium Industries
3
Funds after rationalisation (data for October-December 2005)
Bank Pembangunan Malaysia Berhad
N ew Entrepreneurs Fund 2
Fund for Sm all and M edium Industries
2
Fund for Sm all and M edium Industries 2
Rehabilitation Fund for Sm all and M edium Industries
3
Bank Perusahaan Kecil & Sederhana Malaysia Berhad
Special Fund for Tourism
2
N ew Entrepreneurs Fund
2
N ew Entrepreneurs Fund 2
Bum iputera Industrial Fund
2
Fund for Food
Fund for Sm all and M edium Industries
2
Fund for Sm all and M edium Industries 2
Rehabilitation Fund for Sm all and M edium Industries
3
Table A.69b
Development Financial Institutions: Bank Negara Malaysia Funds
1
7.7 6.4
96.9 87.5
193.3 92.4 182.5 62.7 328.5 377.0
11.8 10.7
4.2 4.1
69.4 54.3
12.8 15.9 8.4 12.7 14.4 22.5
38.6 37.4
282.1 274.3
17.6 13.1
27.4 15.7 12.9 15.6 16.6 27.8
8.5 13.1 8.3 1.1 8.8 8.9
6.3
4.0 3.6
8.2 7.9 7.4
5.0 5.0
1.7 1.5 1.5
1.6 1.6 1.0
20.2 6.4
376.1 87.5
588.9 549.3 436.5
36.0 10.7
6.6 6.6 4.0
234.1
190.2 75.9 51.5
50.3 40.0
P84
74.8 22.3 20.4
Table A.70a
Development Financial Institutions: Funds from Multilateral and International Agencies
Loans (RM m illion)
A pproved D isbursed
O utstanding
as at end-
2004 2005 2005 2005 2004 2004
1
Funds have been fully utilised
Malaysian Industrial Development Finance Berhad
Bank Pertanian Malaysia
A SEA N -Japan D evelopm ent Fund-O verseas Econom ic
C ooperation Fund
1
13.5 21.1 86.0
40.4
A SEA N -Japan D evelopm ent Fund-O verseas Econom ic
C ooperation Fund
1
34.2
0.6 A SEA N -Japan D evelopm ent Fund/EXIM
1
0.2
14.3 0.1 1.2
Japan Bank for International C ooperation-O verseas Econom ic
C ooperation Fund/Sm all and M edium Scale Industry
Prom otion Program m e 0.8 10.9
93.1 14.0 20.3
Japan Bank for International C ooperation-Fund for Sm all and
M edium Industries 38.0 19.0 95.2
Annex
P85

17.5
3.3
2.0

9.3
9.7
2.0

24.7

Japan Bank for International C ooperation


Table A.70b
Development Financial Institutions: Funds from Multilateral and International Agencies
Loans (RM m illion)
A pproved D isbursed
O utstanding
as at end-
2004 2005 2005 2005 2004 2004
1
Funds have been fully utilised
*
**
Funds originated from Bank Industri & Teknologi M alaysia Berhad
Funds prior to rationalisation (data until end-September 2005)
Bank Pembangunan dan Infrastruktur Malaysia Berhad
A SEA N -Japan D evelopm ent Fund-O verseas Econom ic C ooperation Fund
1
Japan Bank for International C ooperation-O verseas Econom ic
C ooperation Fund/Sm all and M edium Scale Industry
Prom otion Program m e
1
Japan Bank for International C ooperation-Fund for Sm all and
M edium Industries
Japan Bank for International C ooperation 1 - JEXIM
1

Islam ic D evelopm ent Bank 4.0


Japan Bank for International C ooperation 2 741.0
Bank Industri & Teknologi Malaysia Berhad
A SEA N -Japan D evelopm ent Fund-O verseas Econom ic C ooperation Fund
1

The Export-Im port Bank of Japan


1

Japan Bank for International C ooperation-O verseas Econom ic


1

Japan Bank for International C ooperation 300


1

Japan Bank for International C ooperation 200


1

Japan Bank for International C ooperation-Fund for Sm all and


M edium Industries
Japan Bank for International C ooperation-O verseas Econom ic
C ooperation Fund/Sm all and M edium Scale Industry
Prom otion Program m e
1
1
Funds after rationalisation (data for October-December 2005)
Bank Pembangunan Malaysia Berhad
Bank Perusahaan Kecil & Sederhana Malaysia Berhad
Export-Import Bank of Malaysia Berhad
2
19.9
24.9

Japan Bank for International C ooperation 200


1

Japan Bank for International C ooperation-Fund for Sm all and


M edium Industries
1
18.1
Japan Bank for International C ooperation 300
1

Japan Bank for International C ooperation 300


1

Japan Bank for International C ooperation-O verseas Econom ic


Prom otion Program m e**1
Japan Bank for International C ooperation-O verseas Econom ic
C ooperation Fund/Sm all and M edium Scale Industry
Prom otion Program m e*1
Japan Bank for International C ooperation-Fund for Sm all and
M edium Industries
Islam ic D evelopm ent Bank
A SEA N -Japan D evelopm ent Fund-O verseas Econom ic C ooperation Fund*
1

Japan Bank for International C ooperation 300


1
Japan Bank for International C ooperation 200
1
Japan Bank for International C ooperation 2
Japan Bank for International C ooperation 1

12.6
3.7

24.8
185.2
72.1
120.7

105.8

46.1
51.1
82.4
62.4 1,127.6
10.2

11.5 3.3 2.2
2.2 1.1 0.9
24.5
3.6
0.9


21.7 16.3 15.9
172.0 153.5 122.4
58.1 30.3 39.6
2.4
8.0
0.1
1,116.6
14.3

96.3
49.5
57.8
116.3 90.5
92.5 69.6 58.8
186.1 144.8
0.4 35.7
3.3
6.0
8.6 38.3
8.7 97.3
3.8 5.6
0.1 40.7
78.1
35.0
204.7 145.7
1.1
1.7
P86
Table A.71
Leasing Companies
1
: Sources and Uses of Funds
A s at end-
2001 2002 2003 2004 2005
RM m illion
Sources
C apital and reserves
Borrow ings from financial institutions
Inter-com pany borrow ings
O thers
Total
Uses
C ash and bank balances
Investm ents
Receivables
Leasing
Factoring
Hire purchase
Others
O thers
1,017 839 770
1,816 1,923 2,141
605 1,343 1,454
2,095 2,400 2,684
5,533 6,505 7,049
157 229 225
327 309 323
2,180 3,014 3,118
1,487 1,423 1,420
17 209 101
453 1,275 1,307
139 299 182
2,869
1,018
1,985
1,001
2,139
6,143
106
309
2,860
1,539
93
1,077
151
2,867 2,953 3,384
1,554
1,759
1,375
2,342
7,030
198
387
2,370
1,508
204
503
155
4,074
1
Statistics show n are for pure leasing com panies only
A s at end-2005, 370 leasing com panies and 35 factoring com panies had registered w ith Bank N egara M alaysia. H ow ever,
only 126 leasing com panies and 21 factoring com panies subm itted statistics pertaining to their operations to Bank N egara
M alaysia. Total assets of the 126 leasing com panies and 21 factoring com panies am ounted to RM 17.5 billion and RM 8.0
billion respectively at end-2005. N evertheless, of the 126 leasing com panies, only 23 w ere pure leasing com panies, w hile
of the 21 factoring com panies, only eight w ere pure factoring com panies. The rem aining com panies only undertook
leasing and factoring business as part of their overall business activities.
Annex
P87
Table A.72
Leasing Companies
1
: Income and Expenditure
D uring the period
2004 2001 2002 2003 2005
RM m illion
Income
Leasing
Factoring
Hire purchase
Others
O thers
Total
Expenditure
Interest paid
Financial institutions
Block discounting
Bad debts w ritten off and provision
O thers
Total
Pre-tax Profit
1
Statistics show n are for pure leasing com panies only
107 217 212
3
51 85 76
11
303 188 306
469 501 607
122 187 165
117 166 155
5 21 10
91 108 35
95 165 199
309 460 398
161 41 209
5 3 2
3
98
45
221
371
115
111
4
67
80
261
110
4
4 9
Incom e from 167 313 302 150 326
226
6
75
20
200
526
141
134
7
5
183
329
197
Table A.73
Leasing Companies
1
: Financing by Sector
D uring the period
2004 2001 2002 2003 2005
RM m illion
Transport and storage
Total
1
Statistics show n are for pure leasing com panies only
695 585 709 1,535
M ining and quarrying
123 102 172 172 139
Electricity
106 125 116 266 66 G eneral com m erce
207 38 97 50 34
O thers 53 128 48 108 103
577
Real estate
0 0 1 0 0
Sector
25 14 33 17 25
C onsum ption credit 0 0 0 0 0
A griculture
9 3 4 3 2
M anufacturing
0 0 0 1 0
Property sector
179 36 68 46 33 Construction
28 2 28 4 0
Residential property
53 54 55 805 63
Business, insurance and other services 116 121 184 113 146
P88
Table A.74
Factoring Companies
1
: Sources and Uses of Funds
A s at end-
2001 2002 2003 2004
RM m illion
Sources
C apital and reserves 164 164 81
Borrow ings from financial institutions 445 293 267
Inter-com pany borrow ings 600 416 267
O thers 658 1,092 425
Total 1,867 1,964 1,040
Uses
C ash and bank balances
0 0
4
45
202 234
Investm ents 35
Receivables 998 1,170
Leasing
4
Factoring 872 1,111
Hire purchase
Others 122 55
O thers 622 525
99
77
644
121
941
185
20
22
614
72
298
59
285
2005
101
618
118
176
1,013
149
13
30
612
84
303
75
358
0
14
24
602
4
542
57
401
1
Statistics show n are for pure factoring com panies only
Table A.75
Factoring Companies
1
: Income and Expenditure
D uring the period
2004 2001 2002 2003 2005
RM m illion
Income
Incom e from
Leasing
Factoring
Hire purchase
Others
O thers
Total
Expenditure
Interest paid
Financial institutions
Block discounting
Bad debts w ritten off and provision
O thers
Total
Pre-tax Profit
57 37 38
12
0
6
2 0
21 29 29
6
17
0
8
116 129
28
297
173 166 335
24 17
0 0
24 28 17
0
9 28 14
56 33 45
89 89 76
84
51
10
20
9
12
38
89
18
0
18
11
21
50
39 77 259
31
0
24
0
6
75
106
15
15
0
5
17
37
68
1
Statistics show n are for pure factoring com panies only
Annex
P89
Table A.76
Factoring Companies
1
: Financing by Sector
D uring the period
2004 2001 2002 2003 2005
RM m illion
Sector
A griculture
M ining and quarrying
M anufacturing
Electricity
G eneral com m erce
Property sector
Construction
Real estate
Residential property
Transport and storage
Business, insurance and other services
C onsum ption credit
O thers
Total
1
Statistics show n are for pure factoring com panies only
N egligible
0
0
58 66 57
2 0
94 140 179
31 270 103
29 222 76
0 48 27
0
20 20
37 541 513
287 1,096 927
1
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1 5 3
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60 50 51
1
46
120
43
36
1
6
37
18
286
0
1
3
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49
1
88
25
21
0
21
242
4
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5
51
0
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