FIN324: Banking Operations & Documentation. CH# 1: The Financial System. The Structure of Malaysian Financial System. The Malaysian Financial System

Transcription

1 FIN324: Banking Operations & Documentation CH# 1: The Financial System The Structure of Malaysian Financial System The Malaysian Financial System Financial Institutions:- Banking System Non-Bank Financial Intermediaries The Financial Markets (4 types) 1

2 The Structure of Malaysian Financial System Banking Systems [monetary inst] Bank Negara Malaysia Banking Institutions a. Comm. Bks (incl. Fin Cos & Insurance and Takaful) and Islamic Bks b. Merchant Bks [non-$tary inst] Others a. Discount Houses [non-$tary inst] b. Rep. Office of Foreign Bks c. Offshore Banks in Labuan IOFC d. Credit Guarantee Corporation [non-$tary inst] (1) FINANCIAL INSTITUTIONS Non-Bank Financial Intermediaries Provident and Pension Funds Development Financial Institution Savings Institutions a. National Savings Bank b. Co-operative operative Societies Others a. Unit Trusts b. Pilgrims Fund Board c. Housing Credit Institutions d. Cagamas Bhd. e. Leasing Cos. f. Factoring Cos. g. Venture Capital Cos. Money & Foreign Exchange Markets Money Market Foreign Exchange Market Capital Markets Equity Market Bond Market a. Public Debt Securities b. Private Debt Securities Structure of the Malaysian Financial System (2) FINANCIAL MARKETS Derivative Markets Commodity Futures Bursa Malaysia (KLSE) CI Futures KLIBOR Futures Offshore Market Labuan International Offshore Financial Center (IOFC) The Banking System The Monetary Institutions:-principal liabilities = $ Central Bank = BNM Commercial Banks The Non-Monetary Institutions:- principal liabilities = near$ closely linked to $tary inst Merchant Banks,Discount House,CGC 2

3 The NBFIs The largest group provident, pension & insurance funds - mobilize members resources in the form of provident & pension contributions & insurance premium to the retirement & ins. schemes. The largest source of non-inflationary long term financing for the public sector. The NBFIs (cont.) Provident & pensions funds: non-profit devote resource for the benefit of the members & their beneficiaries. Insurance Cos: profit-making offer protection against loss of property, income or life for a fee. The Financial Markets Comprise the money & FOREX mkts, the capital mkt & the commodity futures mkt. Later was complemented by the financial futures & options mkts. Most of banking inst operate in the money & forex mkts and the capital mkt. 3

4 The Banking System is controlled & supervised by BNM Bank Negara Malaysia Comm Banks Finance Cos Merchant Banks Discount Hse Money & Forex Mkt CGC Financial Supervision Govt supervision of fin inst by regulators To uphold regulations To maintain stability of financial markets Aims of Supervision To minimize financial loss To enforce applicable laws To prosecute cases of market misconduct To license providers of financial services 4

5 BNM also supervise Labuan IOFC Money & Foreign Exchange Malaysian Govt Securities Private Debt Securities Securities Commission supervise: Financial Futures & Options Exchanges - KL Futures Mkt - KL Options & Financial Futures Exchange Stock Exchanges - Bursa Malaysia (then KLSE) - Bumiputra Stock Exchange Private Debt Securities Others: Registrar of Companies - Stock Exchanges Commodities Trading Commission - Commodity Futures: KL Commodity Exchange 5

6 Bank Negara Malaysia (BNM) History Bank Negara was established on January 26, 1959 to: 1. issue currency, 2. act as banker to the Government, and 3. influence the country s s credit situation. Since its inception there has been seven governors. Historical event attack to devalue the pound sterling in CB s s Objectives s 4 of the CBO To issue currency & keep reserves safeguarding the value of the currency; To act as a banker & financial adviser / agent to the Government; To promote monetary stability & a sound financial structure; ; and To influence the credit situation to the advantage of the country. 6

7 The Functions of BNM to act as: The banker for currency issue To hold/keep the country s s official external reserves & safeguarding the value of the ringgit The banker & financial adviser to the Government Cont. The banker to the banks To promote monetary policy & sound financial structure To influence the credit situation to the advantage of the country 1.Bank for Currency Issue Arrange for the printing of currency notes and minting of coins Issue, re-issue & exchange notes and coins Arrange for the safe custody of unissued stock of currency 7

8 2.Keeper of Intl Reserves & Safeguarding the Value of the RM BNM is the main keeper of the country s official external / international reserves. Intl reserves gold, reserves position in IMF, SDR, & diversified portfolio of ForEx assets denominated in foreign currencies (bank balances, treasury bills & long term securities). 3.Govt s s Banker & Fin Advisor As a banker, fiscal agent & fin advisor to Fed & State Govt and Statutory Auth. As a fiscal agent & financial advisor -manage national debt and the raising of govt loan thru well managed loan programmes Govt s s Banker: manages Govt s s accounts. Provides temporary advances & finances Govt s investment in Treasury Bills & other Govt securities. Fin Advisor: represents in Govt bodies or committees as nation s s policy maker. 4.Banker to the Banks The financial institution maintain various types of account with BNM Eg: : SRR and clearing accounts To distribute currency when receive order from comm bks & charge to their clearing account. Lender of last resort - by extending credit to ensure confidence in orderly operations of the banking system To recommend MoF to issue license to comm bks, merchant bks & fin cos. 8

9 5. Promote monetary stability & a sound financial structure To regulate the volume of money & generation of credit thru wide range of monetary instruments By ensuring price stability which means ensuring that inflation rate is stable/ remains low 6. To influence the credit situation to the advantage of the country BNM has to ensure that money supply in the country is flexible and sufficient to sustain the economic growth By imposing statutory reserve requirements, interest rates regulation Additionally, CB is responsible: To supervise, regulate & develop the insurance industry. To administer the Exchange Control Act in 1989, it was made directly responsible for all exchange matters. 9

10 To meet those objectives, the CB is vested with comprehensive legal powers to regulate & supervise the financial system. 6 Various Acts & Ordinances The CBO The Islamic Banking Act 1983 The BAFIA 1989 The Essential (Protection of Depositors) Regulations 1986 The Insurance Act 1963 The Takaful Act 1984 The introduction of BAFIA marked a special milestone in the legislation (lawmaking) governing the financial institutions. 10

11 Bank & Fin. Inst. Act 1989 Came into force on Oct 1 89 for licensed institution, repealed the Banking Act 1973 & Fin Companies Act The CB s s power to supervise & regulate was extended from deposit-taking taking to finance & credit institutions Ensure proper conduct and expansion/development of banking & financial business in the country The establishment of Labuan as an IOFC on Oct 1 90 also necessitated the enactment of 5 new legislations & the amendment of an existing legislation. These are: Offshore Companies Act 1990 Offshore Banking Act 1990 Offshore Insurance Act 1990 Labuan Trust Companies Act 1990 Labuan Business Activity Tax Act 1990 Income tax (Amendment) Act 1990 Labuan Offshore Financial Services Authority Act

12 Cont. Labuan Offshore Trusts Act 1996 Labuan Offshore Limited Partnerships Act 1997 Labuan Offshore Securities Industry Act 1998 Anti-Money Laundering Act 2001 The objectives of the BNM are inter-related related & complementary. The guiding principle is to act only in the public interest. In the interest of national economic, BNM is to: Promote economic growth Promote high level of employment. Maintain price stability & a reasonable balance in the intl pmt position - ensure the inflation rate remains low & stable 12

13 Cont. Eradicate poverty - To reduce absolute poverty irrespective of race through raising income levels and increasing employment opportunities for all Malaysians eg: : education (free text book, free breakfast, free school uniforms, scholarships, good students (study boarding school, oversea ) Restructure the society - to reduce income imbalances among the major ethnic groups and between the urban and rural areas; - to restructure the employment pattern at all levels and categories of occupation to reflect the ethnic composition of the population - to restructure the pattern of ownership and control in the corporate sector so that Bumiputera will own at least 30 per cent of the equity capital - to create and develop a viable Bumiputera Commercial and Industrial Community through its participation in modern commercial and industrial ventures. In particular, the BNM ensures that the availability and cost of money & credit in the economy are consonant (being in agreement) with national macro economic objectives. 13

14 Statutory Reserve & Liquidity Requirements An effective tool for monetary management in Malaysia where it enables BNM to control the volume of liquidity in the banking system and, hence credit creation in the economy. SRR Banking inst. are required to maintain a certain percentage of their reserve with BNM BNM to control the volume of liquidity the capacity of the commercial banks to generate loans & advances. It s s one of the most effective instruments of monetary & credit control. The prescribed SRR is a percentage of the eligible liabilities (EL) base. Earn no interest 14

15 SLR To maintain a min level of liquidity assets ratio in relation to EL base. Primary reason for the comm banks to have a reservoir of liquidity to meet unusual deposit withdrawals. Excess liquid reserves / assets are maintained voluntarily for the purposes of meeting day-to to-day contingencies. Commercial Banks, Foreign Bank Representative s s Offices & Credit Guarantee Corp. A banking institution was defined to mean a licensed bank, merchant bank or finance company as defined in the BAFIA 89 or an Islamic bank. 15

16 The BAFIA 89 defines a bank as a a person who conducts a banking business. What is Banking Business? Receiving & mobilization of deposits. Paying or collecting cheques drawn or paid by customers. Provision of finance granting of loans & advances. Commercial Banks Raises funds by collecting deposits thru savings, current & FD a/c Main characteristic provide current account facilities where payments / deposits can be made thru issuing / receiving of checks. Also accept deposits for savings a/c, FD & negotiable instruments. Also offer financing & other financial services remittances & letters of credit. 16

17 Functions of Commercial Bank Mobilize the savings Provide the facilities to make payments & receive money Extending loans & advances for working capital, investment & consumption Financing of government paper MGS & TBs Provides various banking facilities & services as authorized by BNM Sources of Funds Domestic Capital & Reserves Deposits (public & private sectors) Negotiable Certificate of Deposits (NCDs( NCDs) Amounts due to financial institutions Bankers Acceptances (BAs) Other liabilities Foreign Amounts due to financial institutions Other liabilities Uses of Funds Domestic Cash Statutory reserves Money at call Amounts due from financial institutions Investments (T-Bills, Govt & Private Securities) Loans (overdraft, term loans, trade bills, other loans) Fixed & other assets Foreign Amounts due from financial institutions Term loans, trade bills, investments & other assets 17

18 Direction of Bank Lending To finance major sectors: - property sector, manufacturing, general commerce and the financing, insurance & business services sector. More than half of new loans extended was channeled to the property, construction & manufacturing sector. Islamic Banking Islamic banking is based on syariah principles, or more particularly under the muamalat section of the syariah principles. 18

19 Islamic banking may be defined as an organized institutional framework designed to spread the application of an interest free banking (SPTF) concept by establishing banks & investment organizations carrying operations in accordance with Islamic economic doctrines (policy, set of guidelines). The Islamic Banking Principles of Liability Products The Liability Products are: Currents Accounts (under the al- Wadiah Yad Dhamanah principle) Savings Accounts ( under the Al- Wadiah Yad Dhamanah principle) General Investment A/C ( under Al- Mudharabah principle) Special Investment A/C (under Al- Mudharabah principle) 19

20 Al-Wadiah Yad Dhamanah (safekeeping with guarantee) Current accounts deposits to safe keeping the funds. The bank guarantees the absolute convenience of use of the funds by the depositors. The bank requests the permission to utilize the said funds. Al-Wadiah Yad Dhamanah (safekeeping with guarantee) Savings accounts. As Wadiah is a trust, the bank becomes the guarantor or custodian The depositor grants the Bank to utilize the money for whatever purpose permitted by SYARIAH. Possibility of earning some profits known as a gift (Al-Hibah) to the depositors as a token of appreciation. Al-Mudharabah (profit sharing) Al Mudharabah refers to a contract made between provider of capital (depositor) and an entrepreneur or fund manager (the Bank) to enable the Bank to carry out business ventures within the Syariah guidelines whereby both parties agree to share the profits from investment according to a mutually agreed ratio. General investment accounts: - the bank accepts the deposits looking for investment opportunities. The funds accepted for specified periods (1, 3, 6, 9, 12 & >15 mths) 20

21 Al-Mudharabah (profit sharing) Entrepreneurship (bank) & capital (depositor): - the depositors don t t participate in the management of the investment. If loss, they shall bear all. Profits will be distributed at the agreed pre-determined ratio and paid when the investment is due. This stated in the investment certificate. For >15 mths, interim profits to be paid at 6 monthly intervals. Al-Mudharabah (profit sharing) Special Investment A/C : The bank may accept deposits from govt or cooperate customers or ordinary customers ( on a selective basis only) the mode of investment & profits distribution are individually negotiated Customers are to bear any loss The Islamic Banking Principles of Asset Products 21

22 The Asset Products are: Project Financing (under the Al- Mudharabah principle) Project Financing (under the Al-Musyarakah principle) Asset Acquisition ( under the Al-Bai Bithaman Ajil principle) Financing the use of services ( under the Al-Ijarah Financing the use of services ( under Al- Ijarah Thumma Al-Bai principle) Al-Mudharabah Al-Mudharabah Project financing: - the bank is the provider of capital & will provide 100% of the project s s capital. Participation in project management: - the project initiator is the entrepreneur who will manage the project without the bank s interference. However, the bank has the right to do follow-up & supervise the project. Profits: - both will negotiate & agree on how to distribute the profits that will be generated fm the project. Loss: - any loss will be borne by the bank. Al-Musyarakah (joint venture) Project financing: - bank & project initiators will both provide the financing at the agreed proportion. Participation in project management: - all parties have the right to participate & have the option to waive the right. Profits: - profits generated will be distributed as agreed. Loss: - all parties will bear the loss in proportion of their share in the financing. 22

23 Al-Bai Bai Bithaman Ajil (deferred payment sale) Customer identifies the asset he wants to purchase and approaches the Bank for financing. Under the Bai Bithaman Ajil concept, the Bank will purchase the asset at cost and sell the same to the customer at cost plus profit on deferred payment basis at the duration and price agreed by both parties payable by fixed instalment. Al-Bai Bai Bithaman Ajil (deferred payment sale) Asset acquisition: - the sales of goods on a deferred payment basis at a price which includes a profit margin agreed to by both parties. Financing the purchase: - the customers who wish to purchase an asset but wish to defer the payment by making fixed installment payments. The purchase is first financed by the bank. - The bank will purchase the asset & resell it to the customer. The selling price will base of the cost of the asset & the bank profit margin. Al-Bai Bai Bithaman Ajil 3.Bank sells at RM 20k + profit Bank Customer 4.Customer repays RM 20k + profit in instalments 2.Bank buys the asset at RM 20,000 1.Customer identifies asset to be purchased Seller/Vendor 23

24 Al-Ijarah (leasing financing the use of services) The bank may buy an asset and then lease the asset to its customer for a fixed period. The period, lease rental & any other terms are to be agreed upon by both parties. Al-Ijarah Thumma Al-Bai (leasing financing the use of services & subsequent asset acquisition) The bank will purchase the asset and lease it to the customer. Both parties also agree that at the end of the lease period, the customer will purchase the asset from the bank at an agreed price with all the lease rentals previously paid constituting part of such a price. The Islamic Banking Principles of Trade Finance 24

25 The Trade Finance services are: Working Capital Financing (under the Al Murabahah principle) Letter of Credit (under Al Wakalah, Al Musyarakah or Al Murabahah) Bank Guarantee (under al Kafalah principle) Al-Murabahah (financing of trade by way of a lump sum deferred pmt cost plus profit sale) The mechanism of financing purchases: Bank appoints the cust as an agent to purchase on its (bank s) behalf. Cust acts as an agent to purchase the goods. Bank pays the supplier or reimburse the cust. Bank then sells the goods to the cust. The price (to be paid at agreed later date) will include the cost plus an agreed profit. The mechanism of financing sales: Bank appoints the cust as an agent to sell on its (bank s) behalf. Bank buys the goods from the cust & pays him the cost of the goods. The cust as an agent, sells the goods & collects the proceeds from the sale on maturity of the credit term sale. Proceeds will be passed on to the bank. 25

26 Al-Wakalah (letter of credit) The cust requests the bank to open an LC. The bank may require the cust to place deposits (under Al Wadiah Yad Dhamanah) in full or part of the price of goods to be purchased. The bank opens the LC. When the LC is negotiated, the bank will pay using the earlier deposits if all terms are complied. The trade documents will be released to the cust and the bank charges a fee & commission for its services rendered. Al-Musyarakah (letter of credit) The cust informs of his LC requirements & negotiates with the bank the terms of Al- Musyarakah financing. The cust deposits his share of the financing. The bank opens the LC. When the LC is negotiated, the bank will pay from the cust s s deposits + bank s share of financing. The trade documents will be released to the cust to take possession of the goods. The cust will dispose them in the matter agreed upon. The bank & cust will share the profit from the venture as stated / provided for in their agreement. Al-Murabahah (letter of credit) The cust informs of his LC requirements & requests the bank to buy the goods indicating he agrees to purchase them upon their arrival. The bank opens the LC. When the LC is negotiated, the bank will pay using its own funds. The bank then resells the goods to the cust at a price (cost + profit margin). Settlement of the sale to the cust may be in cash or deferral (installment) payments. 26

27 Al-Kafalah (bank guarantee) The bank may provide guarantees to its customers for certain purposes: Tender Guarantee; Performance Guarantee; Guarantee for Sub-Contracts; Guarantee in lieu of Security Deposits; Guarantee for Exemption of Custom Duties; Customs Bond; Credit Guarantee; The bank may require the customer to deposit the full or a certain amount for this facility. A fee will be charged. Other Islamic Banking Principles Al-Murabahah (cost plus financing) Its concept refers to the sale of goods at a price which includes a profit margin as agreed by both parties. In its contracts, the price, other costs & the profit margin of the seller must be stated at the time of the agreement of sale. 27

28 Al-Bai Bai Al-Dayn (debt trading bills of exchange) Its concept refers to debt financing the provision of financial resources required for production, commerce & services by way of sale / purchase of trade documents & papers. Only documents evidencing debts carried out in good faith (bona fide) in comm transactions can be traded. Short term facility maturity < a year. Al-Qardhul Hasan (benevolent/charitable loan) Its concept refers to an interest free loan given mainly for welfare purposes. The borrower is only required to repay the principal amount borrowed. He may pay an extra amount as a gift (Al Hibah) at his absolute discretion, as a token of appreciation. Al-Wakalah (agency) Its concept refers to a situation where a person nominates another person to act on his behalf. Eg; money transfers (including foreign exchange). 28

29 Al-Rahn (collateralized borrowing) Its concept refers to an arrangement whereby a valuable asset is placed as a collateral for a debt. The collateral may be disposed in the event of default. Al-Hiwalah (remittance) Its concept refers to a transfer of funds / debt from the depositor / debtor s account to the receiver / creditor s account where a commission or fee (Al- Ujr) may be charged for such service. Al-Ujr (fee) Its concept refers to commissions or fees charged for services. 29

30 Representative Office of Foreign Banks Foreign Bank Representative s s Offices Require banking operation licenses to conduct international business. Serve as a trade & commerce liaison for local & foreign clients. Conduct financial research to collect economic data on the country s investment climate. Eventually to set up joint-venture banks with local partners. The Credit Guarantee Corporation 30

31 CGC To assist small borrowers (SSEs( and hawkers & petty traders) ) in obtaining credit facilities from the commercial banks at reasonable cost. Providing guarantee cover to the commercial banks for credit facilities extended to SSEs. Assisting SSEs with no collateral and also to lessen the lending bank s s risk. Cont. In general, eligibility criteria for an SME to qualify for CGC s guarantee schemes are: The business must be Malaysian owned or resident-controlled company Operating a registered or licensed business in Malaysia Possess a viable business / project Types of credit facilities Term loan, overdrafts, letter of credit, export credit refinancing, bills purchased, tradelines,, trust receipts, hire purchase, leasing, bankers acceptances. 31

32 Finance Companies The BAFIA 89 defines a finance company as a a person who carries on finance company business. Finance Company Business means The business of receiving deposits on deposits accounts, savings accounts or other similar accounts. The lending of money; leasing business; or the business of HP, including that which is subject to the HP Act Other such business as BNM, with the approval of the Minister in charge of Finance may prescribe. 32

33 Finance Companies They are not allowed to accept current / checking account deposits (non interest bearing account). Thus, their costs of funds are generally higher than that of commercial banks. Started with providing consumption loans for purchasing consumer goods & motor vehicles. Also give out short to medium term loans for businesses, housing loans, business of credit cards & traveler s s checks. Sources of Funds Capital & reserves. Deposits fixed, savings, NCDs issued. Amount due to financial institutions. Uses of Funds Cash & Fixed assets. Statutory reserve. Money at call. Amount due from financial institutions. Investments TBills, MGS, stocks & shares & NCDs held. Loans HP, leasing finance, housing loans & other loans. 33

34 Merchant Banks The BAFIA 89 defines a merchant bank as a a person who carries on merchant banking business. Eg: AmInvestment Bank Berhad,, RHB Investment Bank, Public Merchant Bank, CIMB Investment Bank etc 34

35 Merchant banking business is defined as The business of: receiving deposits on fixed deposits accounts; provision of finance. The business of: providing consultancy & advisory services relating to corporate & investment matters; making or managing investments on behalf of any person. Other such business as BNM, with the approval of the Minister in charge of Finance, may prescribe. Merchant banks main activities: Deposits taking & money market operations. Medium term lending. Loan syndication and acting as loan managers. Corporate financial services advising corporate clients on such matters as listing on the Bursa Malaysia, rights issues, mergers and acquisitions. Fund management. BNM has specified that at least 30% of their income must be derived from fee based activities. Sources of Funds Capital & reserves. Deposits fixed, NCDs, repurchase agreements. Amount due to financial institutions. Bankers acceptances. 35

36 Uses of Funds Cash & Fixed assets. Reserves with BNM. Money at call. Amount due from financial institutions. Investments TBills, MGS, NCDs, Cagamas bonds, private securities. Loans short term loans, term loans, revolving credit, trade bills & bankers acceptances. Discount Houses Discount Houses Specialize in ST money market ops. To mobilize surplus ST funds for investment. To provide an active secondary market for the securities of the above investment. Lately, shifted their investment portfolio towards BA, trade bills, PDS & commercial papers better yield. 36

37 Sources of Funds Shareholders funds. Deposits. Repurchase agreements (repos). Uses of Funds Investments: Treasury bills Government securities Bankers acceptances NCDs BNM certificates Cagamas bonds Private debt securities Loans to licensed institutions. Labuan International Offshore Financial Center (LIOFC) 37

38 International Offshore Financial Center (IOFC) No income tax or grant extensive tax exemptions (Bahamas, Bahrain, Cayman Islands). No income tax on income from foreign sources (Costa Rica, HK, Panama). Low tax rates & other incentives (Cyprus, Netherlands, Switzerland). Low tax & special privileges (British Virgin Islands, Channel Islands, Isle of Man). Special incentives & privileges to offshore companies (Luxembourg, Netherlands & Antilles) Labuan International Offshore Financial Center (LIOFC) The island has been made a duty free zone. Built a financial park for the financial institutions to set up their offices. Provides all the normal banking services only in foreign currencies. The Incentives Offered: Minimum tax. Tax abatement for professional services. Abatement of tax for business relating to or letting of a qualified asset. Tax abatement for employment. Tax exemption. Exemption from stamp duty. Secrecy & confidentiality. Exchange control. Competitive pricing. World class teleport. 38

39 International Monetary Fund International Monetary Fund As a regulatory function to be the guardian of the code & conduct. To oversee its members monetary & exchange rate policies. To provide financial & technical assistance. 39