Topic 2

CENTRAL BANK

Central bank
Central

bank system, objective

and role
Financial system control and
monetary policy
Functions and roles of the Central
Bank of Malaysia
Financial policy execution in
Malaysia
BAFIA 1989
2

Learning objectives
Students

will be able to:

Discuss the objective and role of

Central Bank in general
Discuss the objective and role of the
Central Bank of Malaysia
Explain how the Central Bank
conduct monetary policy and the
necessary tools to control the
financial system in Malaysia
Explain about BAFIA 1989
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Central bank
The

most important players in

the financial market
The government authority in
charge of monetary policy
Central banks actions affect
interest rate, the amount of
credit and the money supply
which have direct impacts on
aggregate output and inflation
4

Bank Negara Malaysia

The

Central Bank of Malaya Ordinance 1958

(CBO) (Central Bank of Malaya until the
formation of Malaysia in 1963) was enacted
on 23 October 1958, while the Central Bank
of Malaysia was established on 24 January
1959.
At the same time, the Banking Ordinance,
1958, which provided for the licensing and
regulation of the business of banking in the
Federation of Malaya also came into force.
The CBO was revised in 1994 and is now the
Central Bank of Malaysia Act 1958 (CBA).
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bank negara malaysia

Objectives:

To promote monetary stability and a

sound financial structure
To act as a banker and financial
adviser to the Government
To issue currency and keep reserves
safeguarding the value of currency
To influence the credit situation to
the advantage of the country
6

Bank Negara Malaysia

Three

pillars of central banking

To promote Monetary stability

To promote Financial stability
To facilitate Payments system

Monetary stability
Refers

to the stability of the

value of the Malaysian currency
Ensure price stability
Inflation remains low and stable

Why

maintaining monetary policy

is important?

Monetary stability
Monetary

instability would result in

distortions and undermine of the longterm economic growth prospects of the
country
Inflation is too high
Reduction in purchasing power
Would result in a greater demand for real
assets and less interest to invest in
productive capacity of the economy
Exports more expensive to foreigners
As a result, high inflation would reduce the growth
potential of the economy

Monetary stability
Inflation

is negative

Prices are falling, profits for businesses are

shrinking
They would cut costs and reduce expenditure
Falling prices contracting demand contraction in the
level of overall economic activity

Price

stability

The future value of savings and the future returns

on investments are preserved
Increase in productive capacity which leads to the
creation of new jobs
Allows the economy to expand close to its potential
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Monetary policy
How

does Bank Negara conduct monetary

policy?
Influence the level of interest rates

Monetary

instruments to influence the

money supply which then will influence the
interest rates
The purchase and sale of Bank Negara Malaysia
and Malaysian Government Papers
Statutory reserve requirement
Direct lending and borrowing in the interbank
market
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Monetary stability
Other

functions:

Manages foreign exchange reserves

to meet international obligations

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Financial Stability
Refers

to an environment where
institutions in a financial system are
strong and can continue to meet their
contractual obligations without
interruption or without any external
assistance

Market

participant can also confidently

enter into transactions at prices that do
not change substantially over short
periods
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Financial stability
Why

is financial stability
important?
It creates a conducive
environment for businesses to
undertake their activities and for
savers and investors to enter into
short term or long term contracts
Has a central role in promoting
economic growth
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Fnancial stability
How

is it achieved?
Through the formulation of strong
legal, regulatory and supervisory
framework, and also through the
development and strengthening
of new institutions and system
infrastructure
Develop a sound banking system
Regulate and develop the insurance
sector
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Payment system
It

provides a means of
transferring funds between
parties and for commercial
transactions to be conducted
effectively and efficiently
BNM is entrusted with the role of
ensuring that the payments
system of the country is stable
and operates smoothly
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Payments system
Why

is the smooth functioning of

the payments system is
important?
Any failure of a financial
institutions to settle its
obligations in a timely manner
would result in spillover effects,
resulting in other financial
institutions not being able to
settle their financial obligations
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Payments system
The

role of BNM in ensuring the

safety and efficiency of the
payments system:
Oversees the payments system
involves formulating policies and
guideline
Operates the payments system
Real time gross settlement system
(RENTAS) and the cheque clearing
system (SPICK)
Facilitates further development of

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Other responsibilities of bank negara

malaysia
Economic

and financial adviser to the

Government and participates in
international meetings

Role

of economic adviser

Analyze and assess the developments in the

international and domestic economy and
highlights the areas that need to be addressed
Presents policy recommendations to the Minister of
Finance as well as at various economic policy making
forums

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Other responsibilities of bank

negara malaysia
Role

of financial adviser

Does not provide financing to the Government

Gives regular advice to the Government on the
management of its domestic and external debts
and the terms and timing of Government loan
programmes
Act as the agent for the Government in
negotiations and concluding of loan agreements
Responsible for trading, registering, settlement
and redemption of Government securities
through its computerized systems (RENTAS,
FAST, BIDS)
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Other responsibilities of bank

negara malaysia
International

Relations

Participates in a number of
international meetings, eg. ASEAN
To strengthen co-operation with the
international and financial community in
key areas such as surveillance,
macroeconomic management and
measures to enhance financial stability

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Financial regulation
1.

Banking and Financial Institutions Act 1989

(BAFIA) was introduced on 1 October 1989
Replaced the Banking Act 1973 and the Finance
Companies Act 1969
Is a comprehensive act and extends comprehensive
powers to BNM to supervise a larger spectrum of
financial institutions, with the direct responsibilities to
regulate and supervise all licensed institutions and also
regulate scheduled and non-scheduled institutions
Licensed institutions commercial banks, merchant banks,
finance companies, discount houses, money brokers and foreign
exchange broker
Scheduled institutions issuers of charge/credit cards and
travellers cheques, operations of cash dispensing machines,
development finance institutions, building societies and housing
credit institutions, factoring companies and leasing companies,
and representative offices of foreign banks or foreign
institutions which carry out the business or activities similar to
the scheduled institutions
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financial regulation
Non-scheduled institutions all other statutory
bodies and institutions involved in the provision of
finance and credit

The Act also enable BNM to regulate the

following:
Control of establishment or acquisition of
subsidiaries or opening of offices in Malaysia by a
local or foreign licensed institutions
Maintenance of reserve fund, capital, net working
funds, liquid assets by the financial institutions
Appointment of auditors, submission of financial
statement, exhibition of financial statements,
submission of statistics to BNM
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Financial regulation
2.

Insurance Act 1996

BNM retains a substantial degree of
regulatory control over the management,
control of licensees and the critical aspects
of insurance operations. Areas that need
the approval from BNM are:

The appointment of directors and chief executive

officers
The acquisition or disposal of substantial interests
in shares of a licensee
The establishment of offices and subsidiaries
Appointment of auditors and actuaries
Outsourcing of core insurance activities
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Financial regulation
3.

Anti-Money Laundering Act 2001

AMLA provides comprehensive new
laws for the prevention, detection
and prosecution of money
laundering, the forfeiture of
property derived from, or
involvement in money laundering
and the requirements for record
keeping and reporting of suspicious
transactions for reporting
institutions
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